[Federal Register Volume 71, Number 92 (Friday, May 12, 2006)]
[Rules and Regulations]
[Pages 27798-27939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-4240]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and 
Clarification; Final Rule

  Federal Register / Vol. 71, No. 92 / Friday, May 12, 2006 / Rules and 
Regulations  

[[Page 27798]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1485-F]
RIN 0938-AO06


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and 
Clarification

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final Rule.

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SUMMARY: This final rule updates the annual payment rates for the 
Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The payment 
amounts and factors used to determine the updated Federal rates that 
are described in this final rule have been determined for the LTCH PPS 
rate year July 1, 2006 through June 30, 2007. The annual update of the 
long-term care diagnosis-related group (LTC-DRG) classifications and 
relative weights remains linked to the annual adjustments of the acute 
care hospital inpatient diagnosis-related group system, and will 
continue to be effective each October 1. The outlier threshold for July 
1, 2006, through June 30, 2007, is also derived from the LTCH PPS rate 
year calculations. We are also finalizing policy changes and making 
clarifications.

DATES: This final rule is effective July 1, 2006.

FOR FURTHER INFORMATION CONTACT: 
    Tzvi Hefter, (410) 786-4487 (General information).
    Judy Richter, (410) 786-2590 (General information, payment 
adjustments for special cases, and onsite discharges and readmissions, 
interrupted stays, co-located providers, and short-stay outliers).
    Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
LTC-DRGs, relative weights and case-mix index, market basket, wage 
index, budget neutrality, and other payment adjustments).
    Ann Fagan, (410) 786-5662 (Patient classification system).
    Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and cost-to-
charge ratios).
    Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted 
stay, and transition period).
    Nancy Kenly, (410) 786-7792 (Federal rate update and case-mix 
index).

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded from the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
II. Publication of Proposed Rulemaking
III. Summary of Major Contents of this Final Rule
    A. Update Changes
    B. Policy Changes
    C. MedPAC Recommendations
    D. Impact
IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    F. Method for Updating the LTC-DRG Relative Weights
V. Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate 
Year
    A. Overview of the Development of the Payment Rates
    B. LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Methodology for the Operating Portion of the RPL LTCH PPS 
Market Basket
    3. Methodology for the Capital Portion of the RPL Market Basket
    4. Market Basket Estimate for the 2007 LTCH PPS Rate Year
    C. Standard Federal Rate for the 2007 LTCH PPS Rate Year
    1. Background
    2. Description of a Preliminary Model of an Update Framework 
under the LTCH PPS
    3. Update to the Standard Federal Rate for the 2007 LTCH PPS 
Rate Year
    4. Standard Federal Rate for the 2007 LTCH PPS Rate Year
    D. Calculation of LTCH Prospective Payments for the 2007 LTCH 
PPS Rate Year
    1. Adjustment for Area Wage Levels
    a. Background
    b. Geographic Classifications/Labor Market Area Definitions
    c. Labor-Related Share
    d. Wage Index Data
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Adjustment for High-Cost Outliers (HCOs)
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    4. Other Payment Adjustments
    5. Budget Neutrality Offset to Account for the Transition 
Methodology
    6. One-time Prospective Adjustment to the Standard Federal Rate.
VI. Other Policy Changes for the 2007 LTCH PPS Rate Year
    A. Adjustments for Special Cases
    1. Adjustment of Short-Stay Outlier (SSO) Cases
    a. Changes to the Method for Determining the Payment Amount for 
SSO Cases
    b. Changes to the Determination of Cost-to-Charge Ratios (CCRs) 
and Reconciliation of SSO Cases
    2. The 3-day or Less Interruption of Stay Policy
    B. Special payment provisions for LTCH hospitals within 
hospitals (HwHs) and LTCH satellites
VII. Computing the Adjusted Federal Prospective Payments for the 
2007 LTCH PPS Rate Year
VIII. Transition Period
IX. Payments to New LTCHs
X. Method of Payment
XI. Monitoring
XII. MedPAC Recommendations
    A. Discussion of MedPAC's March 2006 Report to Congress: 
Medicare Payment Policy
    B. RTI Report on MedPAC's June 2004 Recommendations
XIII. Health Care Information Transparency Initiative
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis

Addendum--Tables

Appendix A--Description of a Preliminary Model of an Update Framework 
Under the LTCH PPS

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:
3M 3M Health Information Systems
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 
107-105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 
106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000 
(Pub. L. 106-554)
BLS Bureau of Labor Statistics
CBSA Core-based statistical area
CC Complications and comorbidities
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index

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CMS Centers for Medicare & Medicaid Services
CMSA Consolidated metropolitan statistical area
COLA Cost-of-living adjustment
COPS Medicare conditions of participation
CPI Consumer Price Indexes
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
ECI Employment Cost Indexes
FI Fiscal intermediary
FY Federal fiscal year
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 
104-191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NAICS North American Industrial Classification System
NCHS National Center for Health Statistics
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
QIO Quality Improvement Organization (formerly Peer Review 
organization (PRO))
RIA Regulatory impact analysis
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (begins July 1 and ends June 30)
SIC Standard industrial code
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-
248)
UHDDS Uniform hospital discharge data set

I. Background

A. Legislative and Regulatory Authority

    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals described in section 1886(d)(1)(B)(iv) of the Social 
Security Act (the Act), effective for cost reporting periods beginning 
on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a per 
discharge system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs while maintaining budget neutrality.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In a Federal Register document issued on August 30, 2002, we 
implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 55954). 
This system uses information from LTCH patient records to classify 
patients into distinct long-term care diagnosis-related groups (LTC-
DRGs) based on clinical characteristics and expected resource needs. 
Payments are calculated for each LTC-DRG and provisions are made for 
appropriate payment adjustments. Payment rates under the LTCH PPS are 
updated annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. Generally, for each cost reporting period, a 
hospital-specific ceiling on payments was determined by multiplying the 
hospital's updated target amount by the number of total current year 
Medicare discharges. The August 30, 2002 final rule further details the 
payment policy under the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we also presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 
part 412, subpart O, also contained LTCH provisions related to covered 
inpatient services, limitation on charges to beneficiaries, medical 
review requirements, furnishing of inpatient hospital services directly 
or under arrangement, and reporting and recordkeeping requirements. We 
refer readers to the August 30, 2002 final rule for a comprehensive 
discussion of the research and data that supported the establishment of 
the LTCH PPS (67 FR 55954).
    On June 6, 2003, we published a final rule in the Federal Register 
(68 FR 34122) that set forth the FY 2004 annual update of the payment 
rates for the Medicare PPS for inpatient hospital services furnished by 
LTCHs. It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30.

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We refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
DRGs and are effective each October 1.
    On May 6, 2005, we published the Prospective Payment System for 
Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, 
and Clarifications final rule (70 FR 24168) (hereinafter referred to as 
the RY 2006 LTCH PPS final rule). In this rule, we set forth the 2006 
LTCH PPS rate year annual update of the payment rates for the Medicare 
PPS for inpatient hospital services provided by LTCHs. We also 
discussed clarification of the notification policy for co-located LTCHs 
and satellite facilities. The RY 2006 LTCH PPS final rule also included 
a provision to extend the surgical DRG exception in the 3-day or less 
interruption of stay policy at Sec.  412.531, as well as a provision 
that clarified and modified existing notification requirements for the 
purpose of implementing Sec.  412.532.

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient LOS of 
greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states that 
for cost reporting periods beginning on or after August 5, 1997, a 
hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease, 
must have an average inpatient LOS for all patients, including both 
Medicare and non-Medicare inpatients, of greater than 20 days.
    Section 412.23(e)(3) provides that, subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
Medicare inpatient LOS, specified under Sec.  412.23(e)(2)(i) is 
calculated by dividing the total number of covered and noncovered days 
of stay of Medicare inpatients (less leave or pass days) by the number 
of total Medicare discharges for the hospital's most recent complete 
cost reporting period. Section 412.23 also provides that subject to the 
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, 
the average inpatient LOS specified under Sec.  412.23(e)(2)(ii) is 
calculated by dividing the total number of days for all patients, 
including both Medicare and non-Medicare inpatients (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period.
    In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the 
procedure for calculating a hospital's inpatient average length of stay 
(ALOS) for purposes of classification as a LTCH. That is, if a 
patient's stay includes days of care furnished during two or more 
separate consecutive cost reporting periods, the total days of a 
patient's stay would be reported in the cost reporting period during 
which the patient is discharged (69 FR 25705). Therefore, we revised 
the regulations at Sec.  412.23(e)(3)(ii) to specify that, effective 
for cost reporting periods beginning on or after July 1, 2004, in 
calculating a hospital's ALOS, if the days of an inpatient stay involve 
days of care furnished during two or more separate consecutive cost 
reporting periods, the total number of days of the stay are considered 
to have occurred in the cost reporting period during which the 
inpatient was discharged.
    Fiscal intermediaries (FIs) verify that LTCHs meet the ALOS 
requirements. We note that the inpatient days of a patient who is 
admitted to a LTCH without any remaining Medicare days of coverage, 
regardless of the fact that the patient is a Medicare beneficiary, will 
not be included in the above calculation. Because Medicare would not be 
paying for any of the patient's treatment, data on the patient's stay 
would not be included in the Medicare claims processing systems. As 
described in Sec.  409.61, in order for both covered and noncovered 
days of a LTCH hospitalization to be included, a patient admitted to 
the LTCH must have at least one remaining benefit day (68 FR 34123).
    The FI's determination of whether or not a hospital qualified as a 
LTCH is based on the hospital's discharge data from the hospital's most 
recent complete cost reporting period (Sec.  412.23(e)(3)) and is 
effective at the start of the hospital's next cost reporting period 
(Sec.  412.22(d)). However, if the hospital does not meet the ALOS 
requirement as specified in Sec.  412.23(e)(2)(i) and (ii), the 
hospital may provide the intermediary with data indicating a change in 
the ALOS by the same method for the period of at least 5 months of the 
immediately preceding 6-month period (69 FR 25676). Our interpretation 
of the current regulations at Sec.  412.23(e)(3) was to allow hospitals 
to submit data using a period of at least 5 months of the most recent 
data from the immediately preceding 6-month period.
    As we stated in the FY 2004 Inpatient Prospective Payment System 
(IPPS) final rule, published August 1, 2003, prior to the 
implementation of the LTCH PPS, we did rely on data from the most 
recently submitted cost report for purposes of calculating the ALOS (68 
FR 45464). The calculation to determine whether an acute care hospital 
qualifies for LTCH status was based on total days and discharges for 
LTCH inpatients. However, with the implementation of the LTCH PPS, for 
the ALOS specified under Sec.  412.23(e)(2)(i), we revised Sec.  
412.23(e)(3)(i) to only count total days and discharges for Medicare 
inpatients (67 FR 55970 through 55974). In addition, the ALOS specified 
under Sec.  412.23(e)(2)(ii) is calculated by dividing the total number 
of days for all patients, including both Medicare and non-Medicare 
inpatients (less leave or pass days) by the number of total discharges 
for the hospital's most recent complete cost reporting period. As we 
discussed in the FY 2004 IPPS final rule, we are unable to capture the 
necessary data from our present cost reporting forms (68 FR 45464). 
Therefore, we have notified FIs and LTCHs that until the cost reporting 
forms are revised, for purposes of calculating the ALOS, we will be 
relying upon census data extracted from Medicare Provider Analysis and 
Review (MedPAR) files that reflect each LTCH's cost reporting period 
(68 FR 45464). Requirements for hospitals seeking classification as 
LTCHs that have undergone a change in ownership, as described in Sec.  
489.18, are set forth in Sec.  412.23(e)(3)(iv).
2. Hospitals Excluded from the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects

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authorized under section 402(a) of the Social Security Amendments of 
1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the 
Social Security Amendments of 1972 (Pub. L. 92-603) (42 U.S.C. 1395b-1 
(note)) (Statewide all-payer systems, subject to the rate-of-increase 
test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule, we provided for a 5-year 
transition period from reasonable cost-based reimbursement to a full 
Federal prospective payment based on 100 percent of the Federal rate 
for LTCHs (67 FR 56038). However, existing LTCHs and LTCHs that are not 
defined as new in Sec.  412.533(d) have the option to elect to be paid 
based on 100 percent of the Federal prospective payment. During the 5-
year period, two payment percentages are to be used to determine a 
LTCH's total payment under the PPS. The blend percentages are as shown 
in Table 1.

                                 Table 1
------------------------------------------------------------------------
                                                            Reasonable
                                            Prospective     cost-based
 Cost reporting periods beginning on or       payment      reimbursement
                  after                    federal rate        rate
                                            percentage      percentage
------------------------------------------------------------------------
October 1, 2002.........................              20              80
October 1, 2003.........................              40              60
October 1, 2004.........................              60              40
October 1, 2005.........................              80              20
October 1, 2006.........................             100               0
------------------------------------------------------------------------

D. Limitation on Charges to Beneficiaries

    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec.  409.82, Sec.  409.83, 
and Sec.  409.87 and for items and services as specified under Sec.  
489.30(a) if the Medicare payment to the LTCH is the full LTC-DRG 
payment amount. However, under the LTCH PPS, Medicare will only pay for 
days for which the beneficiary has coverage until the short-stay 
outlier (SSO) threshold is exceeded. (See section V.A.1.a. of this 
preamble.) Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).

E. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance

    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and Health Insurance Portability and Accountability Act (HIPAA) (Pub. 
L. 104-191). Section 3 of the ASCA requires that the Medicare Program 
deny payment under Part A or Part B for any expenses for items or 
services ``for which a claim is submitted other than in an electronic 
form specified by the Secretary.'' Section 1862(h) of the Act (as added 
by section 3(a) of the ASCA) provides that the Secretary shall waive 
such denial in two types of cases and may also waive such denial ``in 
such unusual cases as the Secretary finds appropriate.'' (Also, see 68 
FR 48805, August 15, 2003, implementing section 3 of the ASCA.) Section 
3 of the ASCA operates in the context of the Administrative 
Simplification provisions of HIPAA, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR parts 160 and 162, subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered providers, to conduct 
covered electronic transactions according to the applicable 
transactions and code sets standards.

II. Publication of Proposed Rulemaking

    On January 27, 2006, we published the RY 2007 LTCH PPS proposed 
rule in the Federal Register (71 FR 4648 through 4779) that set forth 
the proposed annual update to the payments for the Medicare prospective 
payment system (PPS) for inpatient hospital services provided by long-
term care hospitals (LTCHs) for the 2007 LTCH PPS rate year. (The 
annual update of the LTC-DRG classifications and relative weights for 
FY 2007 remains linked to the annual adjustments of the acute care 
hospital inpatient DRG system, which will be published by August 1, 
2006 and will be effective October 1, 2006.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4648 through 4779), we 
discussed the proposed annual update to the payment rates for the 
Medicare LTCH PPS, as well as other proposed policy changes. The 
following is a summary of the major areas that we addressed in the 
proposed rule.
    In the proposed rule, we discussed the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, and 
are based on the annual revisions to the International Classification 
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes 
effective each October 1. (See section IV. of this preamble.)
    In addition, we proposed to adopt the ``Rehabilitation, 
Psychiatric, Long-Term Care (RPL)'' market basket under the LTCH PPS in 
place of the excluded hospital with capital market basket. (See section 
V.B. of this preamble.)
    We also proposed a zero percent update to the LTCH PPS Federal rate 
for the 2007 LTCH PPS rate year instead of the most recent estimate of 
the LTCH

[[Page 27802]]

PPS market basket. (See section V.C. of this preamble.)
    In that same proposed rule, we discussed the proposed prospective 
payment rate for RY 2007, and the applicable adjustments to the 
proposed payment rates, including the proposed revisions to the wage 
index, the proposed cost-of-living adjustment factors, the proposed 
outlier threshold, and the proposed transition period budget neutrality 
factor for the 2007 LTCH PPS rate year. We also proposed revisions to 
the cost-to-charge ratio and reconciliation provisions as they apply to 
LTCH outlier payment policies. (See section V.C. and V.D. of this 
preamble.)
    In addition, we discussed our proposal to revise the LTCH PPS 
labor-related share based on RPL market basket and our proposal to 
revise the labor-related and non-labor related shares of the Federal 
rate based on the RPL market basket. We also proposed to postpone the 
deadline for making the one-time prospective adjustment for the Federal 
rate at Sec.  412.523(d)(3). (See section V.D. of this preamble.)
    Also, we proposed to revise the existing payment adjustment for SSO 
cases by reducing the part of the current payment formula that is based 
on costs and adding a fourth component to the current payment formula. 
We also proposed to sunset the surgical DRG exception to the payment 
policy established under the 3-day or less interruption of stay 
regulations at Sec.  412.531(a)(1). (See section VI.A. of this 
preamble.)
    For LTCH hospitals within hospitals (HwHs) and LTCH satellites, we 
proposed to clarify at Sec.  412.534(c) that under the policy for 
adjusting the LTCH PPS payment based on the amount that would be 
determined under the IPPS payment methodology, we will calculate the 
LTCH PPS payment amount that is equivalent to what would otherwise be 
paid under the IPPS. We also proposed to codify in regulations the 
general formula we currently use to give affect to the regulations as 
they pertain to calculating an amount under subpart O that is 
equivalent to an amount that would be determined under Sec.  412.1(a). 
(See section VI.B. of this preamble.)
    In the same proposed rule, we discussed our on-going monitoring 
protocols under the LTCH PPS. (See section XI. of this preamble.)
    In addition, we discussed the recommendations made by the Research 
Triangle Institute, International's (RTI) evaluation of the feasibility 
of adopting recommendations made in the June 2004 MedPAC Report. (See 
section XII. of this preamble.)
    We also analyzed the impact of the proposed changes presented in 
the proposed rule on Medicare expenditures, Medicare-participating 
LTCHs, and Medicare beneficiaries. (See section XIV. of this preamble.)
    In Appendix A of the proposed rule, we presented a description of a 
preliminary model of an update framework under the LTCH PPS that we may 
propose to use in the future for purposes of the annual updating of the 
LTCH PPS Federal rate in future years.
    We received a total of 860 timely comments on the proposed rule. 
The major issues addressed by the commenters included: The proposed 
update framework; the proposed RPL framework; the proposed update to 
the Federal rate for RY 2007; the proposed high cost outlier (HCO) 
threshold for RY 2007; the proposed revision to the cost-to-charge 
ratios and reconciliation provisions as they apply to LTCH outlier 
payment policies; the proposed sunsetting of the surgical-DRG exception 
to the 3-day or less interruption of stay policy; the proposed SSO 
policy; the proposed postponement of the one-time prospective 
adjustment to the standard Federal rate; the proposed clarification of 
the present policy for adjusting the LTCH PPS payment for LTCH HwHs and 
LTCH satellites; and discussion of the recommendations made by RTI.
    Summaries of the public comments received and our responses to 
those comments are described below under the appropriate heading.

III. Summary of the Major Contents of This Final Rule

    In this final rule, we are setting forth the annual update to the 
payment rates for the Medicare LTCH PPS, as well as finalizing other 
policy changes. The following is a summary of the major areas that we 
are addressing in this final rule.

A. Update Changes

    In section IV of this preamble, we discuss the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, 
which are based on the annual revisions to the International 
Classification of Diseases, Ninth Revision, Clinical Modification (ICD-
9-CM) codes effective each October 1.
    In section V. through XII. of this preamble, we specify the factors 
and adjustments used to determine the LTCH PPS rates that are 
applicable to the 2007 LTCH PPS rate year, including revisions to the 
wage index, the applicable adjustments to payments, cost-of-living 
adjustment factors, the outlier threshold, the budget neutrality 
factor, MedPAC recommendations and monitoring.
    In section V.B. of this preamble, we are adopting the 
``Rehabilitation, Psychiatric, Long-Term Care (RPL)'' market basket 
under the LTCH PPS in place of the excluded hospital with capital 
market basket. We are also revising the labor-related share (and non-
labor related share) of the Federal rate based on the RPL market 
basket. (See section V.D.1.c. of this preamble).
    As discussed in section V.C. of this preamble, we are implementing 
a zero percent update to the LTCH PPS Federal rate for the 2007 LTCH 
PPS rate year based on an adjustment to the most recent estimate of the 
LTCH PPS market basket to account for apparent case-mix increase.
    While we proposed to revise the cost-to-charge ratio and 
reconciliation provisions as they apply to LTCH outlier payment 
policies, we are not making these changes in this final rule; rather, 
in response to comments, we are again proposing these policies in the 
FY 2007 IPPS proposed rule, and we are including additional data 
requested by commenters.

B. Policy Changes

    In section V.D.6. of this preamble, we are postponing the deadline 
for making the one-time prospective adjustment for the Federal rate at 
Sec.  412.523(d)(3).
    In section VI.A. of this preamble, we are revising the existing 
payment adjustment for SSO cases. Also in section VI.A. of this 
preamble, we are sunsetting the surgical DRG exception to the payment 
policy established under the 3-day or less interruption of stay 
regulations at Sec.  412.531(a)(1).
    In section VI.B. of this preamble, for LTCH hospitals within 
hospitals (HwHs) and LTCH satellites, we are clarifying at Sec.  
412.534(c) the policy for adjusting the LTCH PPS payment based on the 
amount that would be determined under the IPPS methodology. We state 
the methodology used for calculating the LTCH PPS payment amount that 
is equivalent to what would otherwise be paid under the IPPS. We are 
also codifying in regulations the general formula we currently use to 
give affect to the regulations as they pertain to calculating an amount 
under subpart O that is equivalent to an amount that would be 
determined under Sec.  412.1(a).

C. MedPAC Recommendations

    In section XII.A. of this preamble, we discuss the recommendation 
made in

[[Page 27803]]

the March 2006 Report to Congress: Medicare Payment Policy to eliminate 
an update to payment rates for long-term care services for RY 2007.
    In section XII.B. of this preamble, we discuss Research Triangle 
Institute, International's (RTI) evaluation of the feasibility of 
adopting recommendations made in the June 2004 MedPAC report.
    In Appendix A of this final rule, we present a description of a 
preliminary model of an update framework under the LTCH PPS that we may 
propose to use in the future for purposes of the annual updating of the 
LTCH PPS Federal rate in future years.

D. Impact

    In section XV. of this preamble, we analyze the impact of the 
changes presented in this final rule on Medicare expenditures, 
Medicare-participating LTCHs, and Medicare beneficiaries.

IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights

A. Background

    Section 123 of the BBRA specifically requires that the Secretary 
implement a PPS for LTCHs (that is, a per discharge system with a DRG-
based patient classification system reflecting the differences in 
patient resources and costs in LTCHs while maintaining budget 
neutrality). Section 307(b)(1) of the BIPA modified the requirements of 
section 123 of the BBRA by specifically requiring that the Secretary 
examine ``the feasibility and the impact of basing payment under such a 
system [the LTCH PPS] on the use of existing (or refined) hospital DRGs 
that have been modified to account for different resource use of LTCH 
patients as well as the use of the most recently available hospital 
discharge data.''
    In accordance with section 123 of the BBRA as amended by section 
307(b)(1) of the BIPA and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify these cases into distinct 
LTC-DRGs based on clinical characteristics and estimated resource 
needs. The LTC-DRGs used as the patient classification component of the 
LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We 
assign an appropriate weight to the LTC-DRGs to account for the 
difference in resource use by patients exhibiting the case complexity 
and multiple medical problems characteristic of LTCHs.
    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
In order to manage the large number of low volume DRGs (all DRGs with 
fewer than 25 cases), we group low volume DRGs into 5 quintiles based 
on average charge per discharge. (A listing of the current composition 
of low volume quintiles used in determining the FY 2006 LTC-DRG 
relative weights appears in the FY 2006 IPPS final rule (70 FR 47329 
through 47332). A listing of the composition of proposed low volume 
quintiles used in determining the proposed FY 2007 LTC-DRG relative 
weights appears in the FY 2007 IPPS proposed rule (71 FR 24054 through 
24058). We also account for adjustments to payments for cases in which 
the stay at the LTCH is less than or equal to five-sixths of the 
geometric ALOS and classify these cases as SSO cases. (A detailed 
discussion of the application of the Lewin Group model that was used to 
develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule 
(67 FR 55978).)

B. Patient Classifications into DRGs

    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into LTC-DRGs for payment based on the following six data 
elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from an LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the ICD-
9-CM. HIPAA transactions and code sets standards regulations (45 CFR 
parts 160 and 162) require that no later than October 16, 2003, all 
covered entities must comply with the applicable requirements of 
subparts A and I through R of part 162. Among other requirements, those 
provisions direct covered entities to use the ASC X12N 837 Health Care 
Claim: Institutional, Volumes 1 and 2, version 4010, and the applicable 
standard medical data code sets for the institutional health care claim 
or equivalent encounter information transaction. (See 45 CFR 162.1002 
and 45 CFR 162.1102).
    Medicare FIs enter the clinical and demographic information into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a DRG can be made. During this 
process, the following types of cases are selected for further 
development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a non-approved transplant 
center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, 
Other severe protein-calorie malnutrition, contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
     Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, code 437.9, unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As 
indicated in the August 30, 2002 LTCH PPS final rule, the Medicare 
GROUPER software, which is used under the LTCH PPS, is specialized 
computer software, and is the same GROUPER software program used under 
the IPPS. The GROUPER software was developed as a means of classifying 
each case into a DRG on the basis of diagnosis and procedure codes and 
other demographic information (age, sex, and discharge status). 
Following the LTC-DRG assignment, the Medicare FI determines the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments. Under the LTCH PPS, we 
provide an opportunity for the LTCH to review the LTC-DRG assignments 
made by the FI and to submit additional information within a specified 
timeframe as specified in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases in order 
to measure relative hospital resource consumption to establish the DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the

[[Page 27804]]

MedPAR file. The data in this file are used to evaluate possible DRG 
classification changes and to recalibrate the DRG weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517). As discussed in greater detail in sections IV.D. and 
E. of this preamble, with the implementation of section 503(a) of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA) (Pub. L. 108-173), there is the possibility that one feature of 
the GROUPER software program may be updated twice during a Federal 
fiscal year (FY) (October 1 and April 1) as required by the statute for 
the IPPS (69 FR 48954 through 48957). Specifically, as we discussed in 
the FY 2006 IPPS final rule, ICD-9-CM diagnosis and procedure codes for 
new medical technology may be created and added to existing DRGs in the 
middle of the Federal FY on April 1 (70 FR 47323). However, this policy 
change will have no effect on the LTC-DRG relative weights, which will 
continue to be updated only once a year (October 1), nor will there be 
any impact on Medicare payments under the LTCH PPS. The use of the ICD-
9-CM code set is also compliant with the current requirements of the 
Transactions and Code Sets Standards regulations at 45 CFR parts 160 
and 162, published in accordance with HIPAA.

C. Organization of DRGs

    The DRGs are organized into 25 major diagnostic categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER software program does not recognize all 
ICD-9-CM procedure codes as procedures that affect DRG assignment, that 
is, procedures which are not surgical (for example, EKG), or minor 
surgical procedures (for example, 86.11, Biopsy of skin and 
subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). We note that CCs are defined by 
certain secondary diagnoses not related to, or not inherently a part 
of, the disease process identified by the principal diagnosis. (For 
example, the GROUPER software would not recognize a code from the 
800.0x series, Skull fracture, as a CC when combined with principal 
diagnosis 850.4, Concussion with prolonged loss of consciousness, 
without return to preexisting conscious level.) In addition, we note 
that the presence of additional diagnoses does not automatically 
generate a CC, as not all DRGs recognize a comorbid or complicating 
condition in their definition. (For example, DRG 466, Aftercare without 
History of Malignancy as Secondary Diagnosis, is based solely on the 
principal diagnosis, without consideration of additional diagnoses for 
DRG determination.)
    In its June 2000, Report to Congress, MedPAC recommended that the 
Secretary ``* * * improve the hospital inpatient prospective payment 
system by adopting, as soon as practicable, diagnosis-related group 
refinements that more fully capture differences in severity of illness 
among patients'' (Recommendation 3A, p. 63). In response to that 
recommendation, we determined at that time that it was not practical to 
develop a refinement to inpatient hospital DRGs based on severity due 
to time and resource requirements. However, this does not preclude us 
from development of a severity-adjusted DRG refinement in the future. 
That is, a refinement to the list of CCs could be incorporated into the 
existing DRG structure. It is also possible that a more comprehensive 
severity adjusted structure may be created if a new code set is 
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic 
coding) and ICD-10-PCS (for procedure coding) or by other code sets, a 
severity concept may be built into the resulting DRG assignments. Of 
course, any change to the code set would be adopted through the process 
established in the HIPAA Administrative Simplification Standards 
provisions.
    In its March 2005 Report to Congress, ``Physician-Owned Specialty 
Hospitals,'' MedPAC recommended that the Secretary improve payment 
accuracy in the hospital IPPS by, among other things, ``refining the 
current DRGs to more fully capture differences in severity of illness 
among patients'' (Recommendation 1, p. 93). In the FY 2006 IPPS final 
rule (70 FR 47474 through 47479), we stated that we expected to make 
changes to the DRGs to better reflect severity of illness and we 
indicated that we plan to conduct a comprehensive review of the CCs 
list for FY 2007. We also indicated that we are considering the 
possibility of proposing to use the All Patient Refined (APR) DRGs 
under the IPPS for FY 2007. We explained that we did not propose to 
adopt the APR-DRGS under the IPPS for FY 2006 because it would 
represent a significant undertaking that could have a substantial 
effect on all hospitals and there was insufficient time to fully 
analyze a change of that magnitude. However, as an interim step to 
better recognize severity in the DRG system for FY 2006, until we could 
complete a more comprehensive analysis of the APR-DRG system and CC 
list as part of a complete analysis of the MedPAC recommendations that 
we planned to perform over the next year, we established cardiovascular 
DRGs 547 through 558 as described in the FY 2006 IPPS final rule (70 FR 
47474 through 47478).
    In the FY 2007 IPPS proposed rule, we present the proposed changes 
to the DRG system for FY 2007 (71 FR 24049). In that rule, we proposed 
to use the IPPS GROUPER Version 24.0 for FY 2007 to process LTCH PPS 
claims for LTCH discharges occurring from October 1, 2006 through 
September 30, 2007 (71 FR 24049). As we also noted in that proposed 
rule, in its March 1, 2005 Report to Congress on Medicare Payment 
Policy (page 64) and Recommendation 1 in the 2005 Report to Congress on 
Physician-Owned Specialty Hospitals, MedPAC recommended that CMS, among 
other things, refine the current DRGs under the IPPS to more fully 
capture differences in severity of illness among patients. In 
evaluating this MedPAC recommendation for the IPPS, we are evaluating 
the APR-DRG Grouper used by MedPAC in its analysis. Based on this 
analysis, we developed a consolidated severity adjusted DRG system that 
we believe could be a better alternative for recognizing severity of 
illness among the Medicare population that we are considering to 
propose for future use under the IPPS. As discussed above in this 
section, the LTCH PPS uses the same patient classification system (that 
is, DRGs). In response to MedPAC recommendations that severity adjusted 
DRGs be adopted under the IPPS, we are examining the possibility of 
adopting a consolidated version of the APR-DRGs. In the event that 
severity adjusted DRGs, such as the consolidated severity adjusted 
DRGs, are adopted under the IPPS, we would need to consider whether to 
revise the patient classification system under the LTCH PPS. Any 
proposed changes to the patient classification system would be done 
through notice and comment rulemaking.

[[Page 27805]]

D. Update of LTC-DRGs

    For FY 2006, the LTC-DRG patient classification system was based on 
LTCH data from the FY 2004 MedPAR file, which contained hospital bills 
data from the March 2005 update. The patient classification system 
consists of 526 DRGs that formed the basis of the FY 2006 LTCH PPS 
GROUPER program. The 526 LTC-DRGs included two ``error DRGs.'' As in 
the IPPS, we included two error DRGs in which cases that cannot be 
assigned to valid DRGs will be grouped. These two error DRGs are DRG 
469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 
(Ungroupable). (See the FY 2006 IPPS final rule (70 FR 47323 through 
47341)). The other 524 LTC-DRGs are the same DRGs used in the IPPS 
GROUPER program for FY 2006 (Version 23.0).
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. The ICD-9-CM coding update process was revised as discussed in 
greater detail in the FY 2005 IPPS final rule (69 FR 48954 through 
48957). Specifically, section 503(a) of the MMA includes a requirement 
for updating ICD-9-CM codes twice a year instead of the current process 
of annual updates on October 1 of each year. This requirement is 
included as part of the amendments to the Act relating to recognition 
of new medical technology under the IPPS. (For additional information 
on this provision, including its implementation and its impact on the 
LTCH PPS, refer to the FY 2005 IPPS final rule (69 FR 48952 through 
48957) and the RY 2006 LTCH PPS final rule (70 FR 24172 through 
24177).)
    As discussed in the RY 2006 LTCH PPS final rule, with the 
implementation of section 503(a) of the MMA, there is the possibility 
that one feature of the GROUPER software program may be updated twice 
during a Federal FY (October 1 and April 1) as required by the statute 
for the IPPS (70 FR 24173 through 24175). Specifically, ICD-9-CM 
diagnosis and procedure codes for new medical technology may be created 
and added to existing DRGs in the middle of the Federal FY on April 1. 
No new LTC-DRGs will be created or deleted. Consistent with our current 
practice, any changes to the DRGs or relative weights will be made at 
the beginning of the next Federal FY (October 1). Therefore, there will 
not be any impact on Medicare payments under the LTCH PPS. The use of 
the ICD-9-CM code set is also compliant with the current requirements 
of the Transactions and Code Sets Standards regulations at 45 CFR parts 
160 and 162, issued under HIPAA.
    As we explained in the FY 2006 IPPS final rule, historically in the 
health care industry annual changes to the ICD-9-CM codes were 
effective for discharges occurring on or after October 1 each year (70 
FR 47323). Thus, the manual and electronic versions of the GROUPER 
software, which are based on the ICD-9-CM codes, were also revised 
annually and effective for discharges occurring on or after October 1 
each year. The patient classification system used under the LTCH PPS 
(LTC-DRGs) is based on the DRG patient classification system used under 
the IPPS, which historically had been updated annually and effective 
for discharges occurring on or after October 1 through September 30 
each year. As we also mentioned, the ICD-9-CM coding update process was 
revised as a result of the implementation of section 503(a) of the MMA, 
which includes a requirement for updating ICD-9-CM codes as often as 
twice a year instead of the current process of annual updates on 
October 1 of each year. As discussed in the FY 2005 IPPS final rule, 
this requirement is included as part of the amendments to the Act 
relating to recognition of new medical technology under the IPPS (69 FR 
48954 through 48957). Section 503(a) of the MMA amended section 
1886(d)(5)(K) of the Act by adding a new paragraph (vii) which states 
that ``the Secretary shall provide for the addition of new diagnosis 
and procedure codes on April 1 [sic] of each year, but the addition of 
such codes shall not require the Secretary to adjust the payment (or 
diagnosis-related group classification) * * * until the fiscal year 
that begins after such date.'' This requirement will improve the 
recognition of new technologies under the IPPS by accounting for those 
ICD-9-CM codes in the MedPAR claims data at an earlier date.
    Despite the fact that aspects of the GROUPER software may be 
updated to recognize any new technology ICD-9-CM codes, there will be 
no impact on either LTC-DRG assignments or payments under the LTCH PPS 
at that time. That is, changes to the LTC-DRGs (such as the creation or 
deletion of LTC-DRGs) and the relative weights will continue to be 
updated in the manner and timing (October 1) as they are now.
    Updates to the GROUPER software for both the IPPS and the LTCH PPS 
(for relative weights and the creation or deletion of DRGs) are made in 
the annual IPPS proposed and final rules and are effective each October 
1. We also explained that since we do not publish a midyear IPPS rule, 
April 1 code updates will not be published in a midyear IPPS rule. 
Rather, we will assign any new diagnosis or procedure codes to the same 
DRG in which its predecessor code was assigned, so that there will be 
no impact on the DRG assignments until the following October 1. Any 
coding updates will be available through the websites provided in 
section IV.E. of this preamble and through the Coding Clinic for ICD-9-
CM. Publishers and software vendors currently obtain code changes 
through these sources in order to update their code books and software 
system. If new codes are implemented on April 1, revised code books and 
software systems, including the GROUPER software program, will be 
necessary because we must use current ICD-9-CM codes. Therefore, for 
purposes of the LTCH PPS, because each ICD-9-CM code must be included 
in the GROUPER algorithm to classify each case into an LTC-DRG, the 
GROUPER software program used under the LTCH PPS would need to be 
revised to accommodate any new codes.
    In implementing section 503(a) of the MMA, there will only be an 
April 1 update if new technology codes are requested and approved. We 
note that any new codes created for April 1 implementation will be 
limited to those diagnosis and procedure code revisions primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM has 
been an open process through the ICD-9-CM Coordination and Maintenance 
Committee since 1995. Requestors will be given the opportunity to 
present the merits for a new code and make a clear and convincing case 
for the need to update ICD-9-CM codes through an April 1 update.
    Discharges between October 1, 2005, and September 30, 2006, 
(Federal FY 2006) are using Version 23.0 of the GROUPER software for 
both the IPPS and the LTCH PPS. Consistent with our current practice, 
any changes to the DRGs or relative weights will be made at the 
beginning of the Federal FY (October 1). We will notify LTCHs of any 
revised LTC-DRG relative weights based on the final DRGs and the 
applicable version of the GROUPER software program that will be 
effective October 1, 2006, in the annual IPPS proposed and final rules. 
At the September 2005 ICD-9-CM Coordination and Maintenance Committee 
meeting, there were no requests for an April 1, 2006 implementation of 
ICD-9-CM codes, and therefore, the next update to the

[[Page 27806]]

ICD-9-CM coding system will not occur until October 1, 2006 (FY 2007). 
Presently, as there were no coding changes suggested for an April 1, 
2006 update, the ICD-9-CM coding set implemented on October 1, 2005, 
will continue through September 30, 2006 (FY 2006). The next update to 
the LTC-DRGs and relative weights for FY 2007 will be presented in the 
FY 2007 IPPS proposed and final rules. Furthermore, we would notify 
LTCHs of any revisions to the GROUPER software used under the IPPS and 
LTCH PPS that would be implemented April 1, 2007. As noted previously 
in this section, in the FY 2007 IPPS proposed rule (71 FR 24050), we 
proposed to use Version 24.0 of the CMS GROUPER, which would be used 
under the IPPS for FY 2007, to classify cases for LTCH PPS discharges 
that would occur on or after October 1, 2006 and on or before September 
30, 2007.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as 
recommended to the Secretary by the National Committee on Vital and 
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set, 
National Center for Health Statistics, April 1980'') and as revised in 
1984 by the Health Information Policy Council (HIPC) of the Department 
of Health and Human Services (HHS).
    We note that the ICD-9-CM coding terminology and the definitions of 
principal and other diagnoses of the UHDDS are consistent with the 
requirements of the HIPAA Administrative Simplification Act of 1996 (45 
CFR part 162). Furthermore, the UHDDS was used as a standard for the 
development of policies and programs related to hospital discharge 
statistics by both governmental and nongovernmental sectors for over 30 
years. In addition, the following definitions (as described in the 1984 
Revision of the UHDDS, approved by the Secretary for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS DRGs:
     Diagnoses are defined to include all diagnoses that affect 
the current hospital stay.
     Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
     Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the LOS or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
     All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the FI as part of 
that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM Coordination and Maintenance (C&M) Committee is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS) and CMS, that is charged with maintaining 
and updating the ICD-9-CM system. The C&M Committee is jointly 
responsible for approving coding changes, and developing errata, 
addenda, and other modifications to the ICD-9-CM to reflect newly 
developed procedures and technologies and newly identified diseases. 
The C&M Committee is also responsible for promoting the use of Federal 
and non-Federal educational programs and other communication techniques 
with a view toward standardizing coding applications and upgrading the 
quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
we have the lead responsibility for the ICD-9-CM procedure codes 
included in the Tabular List and Alphabetic Index for Procedures. The 
C&M Committee encourages participation by health-related organizations 
in this process and holds public meetings for discussion of educational 
issues and proposed coding changes twice a year at the CMS Central 
Office located in Baltimore, Maryland. The agenda and dates of the 
meetings can be accessed on our Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes.
    As discussed previously in this section of the preamble, section 
503(a) of the MMA includes a requirement for updating ICD-9-CM codes 
twice a year instead of the current process of annual updates on 
October 1 of each year. This requirement will improve the recognition 
of new technologies under the IPPS by accounting for them in the 
GROUPER software at an earlier date. Because this new statutory 
requirement could have a significant impact on health care providers, 
coding staff, publishers, system maintainers, and software systems, 
among others, we solicited comments on our proposed provisions to 
implement this requirement as part of the FY 2005 IPPS proposed rule 
(69 FR 28220 through 28221). We responded to comments and published our 
new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS 
final rule (69 FR 48954 through 48957).
    While this new requirement states that the Secretary shall not 
adjust the payment of the DRG classification for any codes created for 
use on April 1, DRG software and other systems will have to be updated 
in order to recognize and accept the new codes. If any coding changes 
were implemented on April 1, the Medicare GROUPER software program used 
under both the IPPS and the LTCH PPS would need to be revised to 
reflect the new ICD-9-CM codes because the LTC-DRGs are the same DRGs 
used under the IPPS. Furthermore, although the GROUPER software used 
under both the IPPS and the LTCH PPS would need to be revised to 
accommodate the new codes effective April 1, there would be no 
additions or deletions of DRGs nor would the relative weights used 
under the IPPS and the LTCH PPS, respectively, be changed until the 
annual update on October 1 (to the extent that those changes are 
warranted), just as they are historically updated. As the LTCH PPS is 
based on the IPPS, we adopted the same approach used under the IPPS for 
potential April 1 ICD-9-CM coding changes. That is, we will assign any 
new diagnosis codes or procedure codes to the same DRG in which its 
predecessor code was assigned, so there will be no DRG impact in terms 
of potential DRG assignment until the following October 1. We will 
maintain the current method of publicizing any new code changes, as 
noted below. Current addendum and code title information is published 
on the CMS web page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp. Summary tables showing 
new, revised, and deleted code titles are also posted on the following 
CMS web page: http://www.cms.hhs.gov/

[[Page 27807]]

ICD9ProviderDiagnosticCodes/07--summarytables.asp. Information on ICD-
9-CM diagnosis codes can be found at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/. Information on new, revised, and deleted 
ICD-9-CM codes is also available in the American Hospital Association 
(AHA) publication, the Coding Clinic for ICD-9-CM. AHA also distributes 
information to publishers and software vendors. We also send copies of 
all ICD-9-CM coding changes to our contractors for use in updating 
their systems and providing education to providers.
    If the April 1 changes are made to ICD-9-CM diagnosis or procedure 
codes, LTCHs will be required to obtain the new codes, coding books, or 
encoder updates, and make other system changes in order to capture and 
report the new codes. When we implemented section 503(a) of the MMA in 
the FY 2005 IPPS final rule, we indicated that we were aware of the 
additional burden this will have on health care providers.
    It should be noted that any new codes created for April 1 
implementation will be limited to those diagnosis and procedure code 
revisions primarily needed to describe new technologies and medical 
services. However, we reiterate that the process for discussing updates 
to the ICD-9-CM has been an open process through the ICD-9-CM C&M 
Committee since 1995. Any requestor who makes a clear and convincing 
case for the need to update ICD-9-CM codes for purposes of the IPPS new 
technology add-on payment process through an April 1 update will be 
given the opportunity to present the merits of their proposed new code.
    At the September 2005 C&M Committee meeting, no new codes were 
proposed for update on April 1, 2006. While no DRG additions or 
deletions or changes to relative weights will occur prior to the usual 
October 1 update, in the event any new codes were created to describe 
new technologies and medical services through an April 1, 2006 update, 
under our policy established in the RY 2006 final rule (70 FR 24176), 
LTCH systems would have been expected to recognize and report those new 
codes through the channels as described in this section.
    The ICD-9-CM coding changes that have been adopted by the C&M 
Committee would become effective either at the beginning of each 
Federal FY (October 1) or, in the case of codes created to capture new 
technology, April 1 of each year. Coders will be expected to use the 
most current ICD-9-CM codes, as updated. Because we do not publish a 
mid-year IPPS rule, the currently accepted avenues of information 
dissemination will be used to inform all ICD-9-CM code users of any 
changes to the coding system. These avenues were described in section 
IV.D. of this preamble and were discussed at length in the FY 2005 IPPS 
final rule (69 FR 48956). Coders in LTCHs using the updated ICD-9-CM 
coding system will be on the same schedule as the rest of the health 
care industry. In the past, the updated ICD-9-CM was not available for 
use until October 1 of each year.
    Therefore, because the LTCH PPS and the IPPS use the same GROUPER 
software, the LTCH PPS will be directly affected by the statutory 
mandates directed at the IPPS as amended by section 503(a) of the MMA. 
(We note that there is no statutory requirement in the LTCH PPS to make 
additional payments for new technology.) The practical effect of this 
provision is that the GROUPER software must accept new ICD-9-CM codes 
reflecting the incorporation of new technologies into inpatient 
treatment at an acute care hospital prior to the scheduled annual 
update of the GROUPER software. Despite the fact that there are no 
provisions for additional payments for new technology under the LTCH 
PPS as there are under the IPPS, statutory compliance requires an 
alteration of the GROUPER software used under the IPPS, and since the 
LTCH PPS uses the same GROUPER software that is used under the IPPS, 
this consequently means that the GROUPER software used under the LTCH 
PPS would change. While DRG assignments would not change from October 1 
through September 30, it is possible that there could be additional new 
ICD-9-CM diagnosis and procedure codes during that time, which would be 
assigned to predecessor DRGs. For both the IPPS and LTCH coders, it is 
possible that there will be ICD-9-CM codes in effect from October 1 
through March 31, with additional ICD-9-CM codes in effect from April 1 
through September 30. Presently, as there were no coding changes 
suggested for an April 1, 2006 update, the ICD-9-CM coding set 
implemented on October 1, 2005 will continue through September 30, 2006 
(FY 2006).
    Of particular note to LTCHs are the invalid diagnosis codes (Table 
6C) and the invalid procedure codes (Table 6D) located in the annual 
proposed and final rules for the IPPS. Claims with invalid codes are 
not processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    We emphasize the need for proper coding by LTCHs. Inappropriate 
coding of cases can adversely affect the uniformity of cases in each 
LTC-DRG and produce inappropriate weighting factors at recalibration. 
We continue to urge LTCHs to focus on improved coding practices. 
Because of concerns raised by LTCHs concerning correct coding, we have 
asked the AHA to provide additional clarification or instruction on 
proper coding in the LTCH setting. The AHA will provide this 
instruction via their established process of addressing questions 
through their publication, the Coding Clinic for ICD-9-CM. Written 
questions or requests for clarification may be addressed to the Central 
Office on ICD-9-CM, American Hospital Association, One North Franklin, 
Chicago, IL 60606. A form for question(s) is available for download and 
can be mailed on AHA's Web site at: http://www.ahacentraloffice.org. In 
addition, current coding guidelines are available at the NCHS Web site: 
http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#conv.
    In conjunction with the cooperating parties (AHA, the American 
Health Information Management Association (AHIMA), and NCHS), we 
reviewed actual medical records and are concerned about the quality of 
the documentation under the LTCH PPS, as was the case at the beginning 
of the IPPS. We fully believe that, with experience, the quality of the 
documentation and coding will improve, as it did for the IPPS. The 
cooperating parties have plans to assist their members with improvement 
in documentation and coding issues for the LTCHs through specific 
questions and coding guidelines. The importance of good documentation 
is emphasized in the revised ICD-9-CM Official Guidelines for Coding 
and Reporting: ``A joint effort between the attending physician and 
coder is essential to achieve complete and accurate documentation, code 
assignment, and reporting of diagnoses and procedures. The importance 
of consistent, complete documentation in the medical record cannot be 
overemphasized. Without this documentation, the application of all 
coding guidelines is a difficult, if not impossible, task'' (Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002, page 115).
    To improve medical record documentation, LTCHs should be aware that 
if the patient is being admitted for continuation of treatment of an 
acute or

[[Page 27808]]

chronic condition, guidelines at Section I.B.10 of the Coding Clinic 
for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable for the 
selection of principal diagnosis. To clarify coding advice issued in 
the August 30, 2002 final rule (67 FR 55979), at Guideline I.B.12, Late 
Effects, we state that a late effect is considered to be the residual 
effect (condition produced) after the acute phase of an illness or 
injury has terminated (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, 
page 129). Regarding whether a LTCH should report the ICD-9-CM code(s) 
for an unresolved acute condition instead of the code(s) for late 
effects of rehabilitation, we emphasize that each case must be 
evaluated on its unique circumstances and coded appropriately. 
Depending on the documentation in the medical record, either a code 
reflecting the acute condition or rehabilitation could be appropriate 
in a LTCH.
    Since implementation of the LTCH PPS, our Medicare FIs have 
conducted training and provided assistance to LTCHs in correct coding. 
We have also issued manuals containing procedures as well as coding 
instructions to LTCHs and FIs. We will continue to conduct training and 
provide guidance on an as-needed basis. We also refer readers to the 
detailed discussion on correct coding practices in the August 30, 2002 
LTCH PPS final rule (67 FR 55981 through 55983). Additional coding 
instructions and examples will be published in the Coding Clinic for 
ICD-9-CM.

F. Method for Updating the LTC-DRG Relative Weights

    As discussed in the August 30, 2002 LTCH PPS final rule that 
implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a 
payment that represents an appropriate amount for the efficient 
delivery of care to Medicare patients (67 FR 55984). The system must be 
able to account adequately for each LTCH's case-mix in order to ensure 
both a fair distribution of Medicare payments and access to adequate 
care for those Medicare patients whose care is more costly. Therefore, 
in Sec.  412.523(c), we adjust the standard Federal PPS rate by the 
LTC-DRG relative weights in determining payment to LTCHs for each case.
    Under this payment system, relative weights for each LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups as 
described in Sec.  412.515. To ensure that Medicare patients who are 
classified to each LTC-DRG have access to an appropriate level of 
services and to encourage efficiency, we calculate a relative weight 
for each LTC-DRG that represents the resources needed by an average 
inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG 
with a relative weight of 2 will, on average, cost twice as much as 
cases in a LTC-DRG with a weight of 1.
    As we discussed in the FY 2006 IPPS final rule, the LTC-DRG 
relative weights effective under the LTCH PPS for Federal FY 2006 were 
calculated using the March 2005 update of FY 2004 MedPAR data and 
Version 23.0 of the GROUPER software (70 FR 47325). We use total days 
and total charges in the calculation of the LTC-DRG relative weights.
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
Distribution of cases with relatively high (or low) charges in specific 
LTC-DRGs has the potential to inappropriately distort the measure of 
average charges. To account for the fact that cases may not be randomly 
distributed across LTCHs, we use a hospital-specific relative value 
method to calculate relative weights. We believe this method removes 
this hospital-specific source of bias in measuring average charges. 
Specifically, we reduce the impact of the variation in charges across 
providers on any particular LTC-DRG relative weight by converting each 
LTCH's charge for a case to a relative value based on that LTCH's 
average charge. (See the FY 2006 IPPS final rule for further 
information on the hospital-specific relative value methodology (70 FR 
47328 through 47329).)
    To account for LTC-DRGs with low volume (that is, with fewer than 
25 LTCH cases), we grouped those low volume LTC-DRGs into 1 of 5 
categories (quintiles) based on average charges, for the purposes of 
determining relative weights. For FY 2006, based on the FY 2004 MedPAR 
data, we identified 171 LTC-DRGs that contained between 1 and 24 cases. 
This list of low volume LTC-DRGs was then divided into 1 of the 5 low 
volume quintiles, each containing a minimum of 34 LTC-DRGs (171/5 = 34 
with 1 LTC-DRG as a remainder). Each of the low volume LTC-DRGs grouped 
to a specific quintile received the same relative weight and ALOS using 
the formula applied to the regular LTC-DRGs (25 or more cases). (See 
the FY 2006 IPPS final rule for further explanation of the development 
and composition of each of the 5 low volume quintiles for FY 2006 (70 
FR 47329 through 47332).)
    After grouping the cases in the appropriate LTC-DRG, we calculated 
the relative weights by first removing statistical outliers and cases 
with a LOS of 7 days or less. Next, we adjusted the number of cases 
remaining in each LTC-DRG for the effect of short-stay outlier cases 
under Sec.  412.529. The short-stay adjusted discharges and 
corresponding charges were used to calculate ``relative adjusted 
weights'' in each LTC-DRG using the hospital-specific relative value 
method. We also adjusted the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights. That is, we made an 
adjustment if cases classified to the LTC-DRG ``with complications or 
comorbidities (CCs)'' of a ``with CC''/''without CC'' pair had a lower 
average charge than the corresponding LTC-DRG ``without CCs'' by 
assigning the same weight to both LTC-DRGs in the ``with CC''/''without 
CC'' pair. (See the FY 2006 IPPS final rule for further details on the 
steps for calculating the LTC-DRG relative weights (70 FR 47336 through 
47341).)
    In addition, of the 526 LTC-DRGs in the LTCH PPS for FY 2006, based 
on LTCH cases in the FY 2004 MedPAR files, we identified 196 LTC-DRGs 
for which there were no LTCH cases in the database. That is, no 
patients who would have been classified to those DRGs were treated in 
LTCHs during FY 2004 and, therefore, no charge data were reported for 
those DRGs. Thus, in the process of determining the relative weights of 
LTC-DRGs, we were unable to determine weights for these 196 LTC-DRGs 
using the method described in this section of the preamble. However, 
since patients with a number of the diagnoses under these LTC-DRGs may 
be treated at LTCHs beginning in FY 2006, we assigned relative weights 
to each of the 196 ``no volume'' LTC-DRGs based on clinical similarity 
and relative costliness to one of the remaining 330 (526-196 = 330) 
LTC-DRGs for which we were able to determine relative weights, based on 
the FY 2004 claims data. (A list of the current no-volume LTC-DRGs and 
further explanation of their FY 2006 relative weight assignment can be 
found in the FY 2006 IPPS final rule (70 FR 47337 through 47341).)
    Furthermore, for FY 2006, we established LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver, lung, and simultaneous pancreas/
kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, 
respectively) because Medicare will only cover these procedures if they 
are performed at a

[[Page 27809]]

hospital that has been certified for the specific procedures by 
Medicare and presently no LTCH has been so certified. If in the future, 
however, a LTCH applies for certification as a Medicare-approved 
transplant center, we believe that the application and approval 
procedure would allow sufficient time for us to propose appropriate 
weights for the LTC-DRGs affected. At the present time, we included 
these 6 transplant LTC-DRGs in the GROUPER software program for 
administrative purposes. As the LTCH PPS uses the same GROUPER software 
program for LTCHs as is used under the IPPS, removing these DRGs would 
be administratively burdensome.
    As we noted previously, there were no new ICD-9-CM code requests 
for an April 1, 2006 update. Therefore, Version 23.0 of the DRG GROUPER 
software established in the FY 2006 IPPS final rule (70 FR 47284 
through 47322) will continue to be effective until October 1, 2006. 
Moreover, the LTC-DRGs and relative weights for FY 2006 established in 
that same IPPS final rule (70 FR 47681 through 47689) will continue to 
be effective until October 1, 2006, (just as they would have been even 
if there had been any new ICD-9-CM code requests for an April 1, 2006 
update). Accordingly, Table 3 in the Addendum to this final rule lists 
the LTC-DRGs and their respective relative weights, geometric ALOS, and 
five-sixths of the geometric ALOS that we will continue to use for the 
period of July 1, 2006 through September 30, 2006. (This table is the 
same as table 11 of the Addendum to the FY 2006 IPPS final rule (70 FR 
47681 through 47689). The next update to the ICD-9-CM coding system was 
presented in the FY 2007 IPPS proposed rule (since there will be no 
April 1, 2006 updates to the ICD-9-CM coding system). In addition, the 
proposed DRGs and GROUPER for FY 2007 that would be used for the IPPS 
and the LTCH PPS, effective October 1, 2006, were presented in the IPPS 
FY 2007 proposed rule in the Federal Register (71 FR 24049 through 
24068). As discussed in that proposed rule, we proposed to calculate 
the proposed LTC-DRG relative weights for FY 2007 using total Medicare 
allowable charges from FY 2005 Medicare LTCH bill data from the 
December 2005 update of the MedPAR file, which were the best available 
data at that time, and we used the proposed Version 24.0 of the CMS 
GROUPER, which would be the same GROUPER that we proposed to use under 
the IPPS in FY 2007 to classify cases. Furthermore, to calculate the 
final LTC-DRG relative weights for FY 2007, we proposed that if more 
recent data are available (for example, data from the March 2006 update 
of the MedPAR file), we would use that data and use the finalized 
Version 24.0 of the CMS GROUPER. Table 11 of the Addendum to the FY 
2007 IPPS proposed rule lists the proposed LTC-DRGs and their 
respective proposed relative weights, proposed geometric ALOS, and 
proposed five-sixths of the geometric ALOS that would be effective for 
LTCH PPS discharges occurring on or after October 1, 2006 through 
September 30, 2007 (71 FR 24394 through 24403).

V. Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate 
Year

A. Overview of the Development of the Payment Rates

    The LTCH PPS was effective for a LTCH's first cost reporting period 
beginning on or after October 1, 2002. Effective with that cost 
reporting period, LTCHs are paid, during a 5-year transition period, on 
the basis of an increasing proportion of the LTCH PPS Federal rate and 
a decreasing proportion of a hospital's payment under the reasonable 
cost-based payment system, unless the hospital makes a one-time 
election to receive payment based on 100 percent of the Federal rate 
(see Sec.  412.533). New LTCHs (as defined at Sec.  412.23(e)(4)) are 
paid based on 100 percent of the Federal rate, with no phase-in 
transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth in the regulations at Sec.  412.515 through 
Sec.  412.532. Below we discuss the factors that will be used to update 
the LTCH PPS standard Federal rate for the 2007 LTCH PPS rate year that 
will be effective for LTCH discharges occurring on or after July 1, 
2006 through June 30, 2007. When we implemented the LTCH PPS in the 
August 30, 2002 final rule (67 FR 56029 through 56031), we computed the 
LTCH PPS standard Federal payment rate for FY 2003 by updating the best 
available (FY 1998 or FY 1999) Medicare inpatient operating and capital 
costs per case data, using the excluded hospital market basket.
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs be budget neutral for the initial year of implementation. 
Therefore, in calculating the standard Federal rate under Sec.  
412.523(d)(2), we set total estimated LTCH PPS payments equal to 
estimated payments that would have been made under the reasonable cost-
based payment methodology had the PPS for LTCHs not been implemented. 
Section 307(a) of the BIPA specified that the increases to the 
hospital-specific target amounts and the cap on the target amounts for 
LTCHs for FY 2002 provided for by section 307(a)(1) of the BIPA shall 
not be considered in the development and implementation of the LTCH 
PPS.
    Furthermore, as specified at Sec.  412.523(d)(1), the standard 
Federal rate is reduced by an adjustment factor to account for the 
estimated proportion of outlier payments under the LTCH PPS to total 
estimated LTCH PPS payments (8 percent). For further details on the 
development of the FY 2003 standard Federal rate, see the August 30, 
2002 LTCH PPS final rule (67 FR 56027 through 56037), and for 
subsequent updates to the LTCH PPS Federal rate, refer to the following 
final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), 
RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), and RY 2006 
LTCH PPS final rule (70 FR 24179 through 24180).

B. LTCH PPS Market Basket

    Historically, the Medicare program used a market basket to account 
for price increases of the services furnished by providers. The market 
basket used for the LTCH PPS includes both operating and capital-
related costs of LTCHs because the LTCH PPS uses a single payment rate 
for both operating and capital-related costs. The development of the 
LTCH PPS standard Federal rate is discussed in further detail in the 
August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).
    In the August 30, 2002 final rule (67 FR 56016 through 56017 and 
56030), which implemented the LTCH PPS, we established the use of the 
excluded hospital with capital market basket as the LTCH PPS market 
basket. The excluded hospital market basket was used to update the 
limits on LTCHs' operating costs for inflation under the former 
reasonable cost-based (TEFRA) payment system. We explained in that same 
final rule that we believe that the use of the excluded hospital market 
basket to update LTCHs' costs for inflation was appropriate because the 
excluded hospital market basket (with a capital component) measures 
price increases of the services furnished by excluded hospitals, 
including LTCHs. Since the costs of LTCHs are included in the excluded 
hospital market basket, this market basket index, in part, also 
reflects the costs of LTCHs. However, in order to capture the total 
costs (operating and capital-related) of LTCHs, we added a capital 
component to the excluded hospital market basket for use under the LTCH 
PPS. We refer to this index as the ``Excluded Hospital

[[Page 27810]]

with Capital'' market basket. Currently, the excluded hospital with 
capital market basket used to update LTCH PPS payments is based on 1997 
Medicare cost report data and includes Medicare participating 
psychiatric, rehabilitation, long term care, cancer, and childrens 
hospitals (68 FR 34137). (For further details on the development of the 
FY 1997-based excluded hospital with capital market basket used under 
the LTCH PPS, see the RY 2004 LTCH PPS final rule (68 FR 34134 through 
34137)).
    In the RY 2006 LTCH PPS final rule (70 FR 24179), we noted that 
based on our research, we did not develop a market basket specific to 
LTCH services. Presently, we are still unable to create a separate 
market basket specifically for LTCHs due to the small number of 
facilities and the limited data that are provided (for instance, 
approximately 15 percent of LTCHs reported contract labor cost data for 
2002). We noted in that same final rule that we would discuss the use 
of the ``Rehabilitation, Psychiatric and Long-Term Care (RPL) market 
basket'' under the LTCH PPS, which is currently used under the 
inpatient rehabilitation facility (IRF) PPS. The RPL market basket is 
based on the operating and capital costs of IRFs, inpatient psychiatric 
facilities (IPFs) and LTCHs. Since all IRFs are now paid under the IRF 
PPS Federal payment rate, nearly all LTCHs are paid 100 percent of the 
Federal rate under the LTCH PPS, and most IPFs are transitioning to 
payment based on 100 percent of the Federal per diem payment amount 
under the IPF PPS (payments will be based on 100 percent of the Federal 
rate for cost reporting periods beginning on or after January 1, 2008), 
under the broad authority conferred upon the Secretary by section 123 
of the BBRA as amended by section 307(b) of the BIPA to develop the 
LTCH PPS, in the RY 2007 LTCH PPS proposed rule (71 FR 4659), we 
proposed to adopt the RPL market basket as the appropriate market 
basket of goods and services under the LTCH PPS for discharges 
occurring on or after July 1, 2006. In that proposed rule, we proposed 
that we would adopt the RPL market basket based on FY 2002 cost report 
data beginning in the 2007 LTCH PPS rate year, under the LTCH PPS. We 
chose to use the FY 2002 Medicare cost reports because these are the 
most recent, relatively complete cost data for IRFs, IPFs, and LTCHs 
serving Medicare beneficiaries.
    As also discussed in that proposed rule, the RPL market basket 
reflects the operating and capital cost structures for IRFs, IPFs, and 
LTCHs. We proposed to exclude children's hospitals, cancer hospitals, 
and religious nonmedical healthcare institutions (RNHCIs) from the RPL 
market basket because their payments are based entirely on reasonable 
costs subject to rate-of-increase limits established under the 
authority of section 1886(b) of the Act, and implemented in Sec.  
413.40. Children's hospitals, cancer hospitals, and RNHCIs are not 
reimbursed under a PPS. Also, based on FY 2002 data, the cost 
structures for these hospitals are noticeably different than the cost 
structures of the IRFs, IPFs, and LTCHs. The services offered in IRFs, 
IPFs, and LTCHs are typically more labor-intensive than those offered 
in cancer hospitals, children's hospitals, and RNHCIs. Therefore, the 
compensation cost weights for IRFs, IPFs, and LTCHs are larger than 
those in cancer hospitals, children's hospitals, and RNHCIs. In 
addition, the depreciation cost weights for IRFs, IPFs, and LTCHs are 
noticeably smaller than those for children's hospitals, cancer 
hospitals, and RNCHIs. Therefore, including the fact that IRFs, IPFs, 
and LTCHs are subject to a PPS while children's hospitals, cancer 
hospitals and RNCHIs continue to receive payment based on reasonable 
costs, we believe a market basket based on the data of IRFs, IPFs, and 
LTCHs is appropriate to use under the LTCH PPS since it is the best 
available data that would reflect the cost structures of LTCHs.
    Comment: We received several comments supporting our proposal to 
adopt the RPL market basket based on FY 2002 cost report data under the 
LTCH PPS, beginning in the 2007 LTCH PPS rate year. Along with their 
endorsement of this proposal, a few commenters stated that the proposed 
capital weight methodology may be skewed. As previously stated in this 
rule, we stated in the proposed rule that the depreciation cost weights 
for IRFs, IPFs, and LTCHs are smaller than those for children's and 
cancer hospitals. The commenter noted that since most LTCHs are ``units 
within hospitals'' (that is, hospitals-within-hospitals), the proposed 
methodology may be more heavily aligned with a ``unit'' perspective as 
proposed to a ``freestanding hospital'' perspective. The commenters 
claim that freestanding LTCHs will have higher depreciation costs, 
which are probably closer to those associated with children's and 
cancer hospitals.
    Response: The RPL market basket is based on data from freestanding 
IRFs, IPFs, and LTCHs. As a general rule, we do not include hospital-
based facilities in our market baskets because expense data for a 
hospital-based facility are influenced by the allocation of overhead 
over the entire institution. Due to this method of allocation, total 
expenses will be correct, but the expenses of the individual components 
may be skewed. The cost structures of freestanding LTCHs should reflect 
purchasing patterns of the average LTCH.
    Our analysis of depreciation cost weights is based on freestanding 
facilities. This depreciation cost weight (depreciation costs as a 
percent of total capital costs) for freestanding LTCHs is approximately 
57 percent compared to 85 percent for children's and cancer hospitals. 
Therefore, we do not believe that the proposed capital weight 
methodology is skewed (that is, more heavily aligned with a hospital-
based perspective since they are not included in our market basket). 
Rather, we believe the RPL market basket accurately reflects the 
capital cost structure of freestanding LTCHs serving Medicare 
beneficiaries.
    In the following discussion, we provide a background on market 
baskets and describe the methodologies we used to develop the operating 
and capital portions of the FY 2002-based RPL market basket that we are 
adopting for use under the LTCH PPS beginning in RY 2007 under broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA.
1. Overview of the RPL Market Basket
    The RPL market basket is a fixed weight, Laspeyres-type price index 
that is constructed in three steps. First, a base period is selected 
(in this case, FY 2002) and total base period expenditures are 
estimated for a set of mutually exclusive and exhaustive spending 
categories based upon type of expenditure. Then the proportion of total 
costs that each category represents is determined. These proportions 
are called cost or expenditure weights. Second, each expenditure 
category is matched to an appropriate price or wage variable, referred 
to as a price proxy. In nearly every instance, these price proxies are 
price levels derived from publicly available statistical series that 
are published on a consistent schedule, preferably at least on a 
quarterly basis. Finally, the expenditure weight for each cost category 
is multiplied by the level of its respective price proxy for a given 
period. The sum of these products (that is, the expenditure weights 
multiplied by their price levels) for all cost categories yields the 
composite index level of the market basket in a given period. Repeating 
this step for other periods produces a series of market basket levels 
over time. Dividing an

[[Page 27811]]

index level for a given period by an index level for an earlier period 
produces a rate of growth in the input price index over that time 
period.
    A market basket is described as a fixed-weight index because it 
answers the question of how much it would cost, at another time, to 
purchase the same mix of goods and services purchased to provide 
hospital services in a base period. The effects on total expenditures 
resulting from changes in the quantity or mix of goods and services 
(intensity) purchased subsequent to the base period are not measured. 
In this manner, the market basket measures only pure price change. Only 
when the index is rebased would the quantity and intensity effects be 
captured in the cost weights. Therefore, we rebase the market basket 
periodically so that cost weights reflect changes in the mix of goods 
and services that hospitals purchase (hospital inputs) to furnish 
patient care between base periods.
    The terms rebasing and revising, while often used interchangeably, 
actually denote different activities. Rebasing means moving the base 
year for the structure of costs of an input price index (for example, 
shifting the base year cost structure from FY 1997 to FY 2002). 
Revising means changing data sources, methodology, or price proxies 
used in the input price index. In this final rule, we are rebasing and 
revising the market basket used to update the LTCH PPS. Specifically, 
as noted above in this section and as we proposed in the RY 2007 LTCH 
PPS proposed rule (71 FR 4659 through 4666), beginning in the 2007 LTCH 
PPS rate year, we are using the FY 2002-based RPL market basket, which 
is described in greater detail below in this section.
2. Methodology for the Operating Portion of the RPL Market Basket
    The operating portion of the FY 2002-based RPL market basket 
consists of several major cost categories derived from the FY 2002 
Medicare cost reports for IRFs, IPFs, and LTCHs: Wages, drugs, 
professional liability insurance (PLI), and a residual ``all other'' 
category. We choose to use the FY 2002 Medicare cost reports because 
these are the most recent, relatively complete cost data for IRFs, 
IPFs, and LTCHs serving Medicare beneficiaries. Generally, if detailed 
cost data are not available for these Medicare cost reports, we prefer 
to use the IPPS hospital Medicare cost reports to supplement IPF, IRF, 
and LTCH data because this is a comprehensive source of cost data for 
hospitals serving Medicare beneficiaries. When the IPPS Medicare cost 
report data are not available, we choose the best publicly available 
data source, such as the Bureau of Economic Analysis Input-Output (I-O) 
Tables.
    We use the IRF, IPF, and LTCH Medicare cost reports to derive these 
major cost categories for the RPL market basket which include wages, 
drugs, PLI, and a residual ``all other'' category. As stated above in 
this section, we are using FY 2002 as the base year because we believe 
this is the most recent, relatively complete year of Medicare cost 
report data. Due to insufficient Medicare cost report data for IRFs, 
IPFs, and LTCHs, we will develop cost weights for benefits, contract 
labor, and blood and blood products using the FY 2002-based IPPS market 
basket (70 FR 23384), which we explain in more detail later in this 
section. For example, less than 30 percent of IRFs, IPFs, and LTCHs 
reported benefit cost data in FY 2002. We noticed an increase in the 
cost data for these expense categories over the last 4 years. (We note 
that in the future, there may be sufficient IRF, IPF, and LTCH cost 
report data to develop the weights for these expenditure categories.)
    Since the cost weights for the RPL market basket are based on 
facility costs, we are limiting our sample to hospitals with a Medicare 
average length of stay (ALOS) within a comparable range of the total 
facility ALOS. We believe this provides a more accurate reflection of 
the structure of costs for Medicare treatments. Our goal is to measure 
cost shares that are reflective of case-mix and practice patterns 
associated with providing services to Medicare beneficiaries.
    We are using those cost reports for IRFs and LTCHs whose Medicare 
ALOS is within 15 percent (that is, 15 percent higher or lower) of the 
total facility ALOS for the hospital. This is the same edit applied to 
the FY 1992-based and FY 1997-based excluded hospital with capital 
market basket. Consistent with the development of the RPL market basket 
adopted under the IRF PPS in the FY 2006 IRF PPS final rule (70 FR 
47909), we will use 15 percent because it includes those LTCHs and IRFs 
whose Medicare ALOS is within approximately 5 days of the facility 
ALOS. We believe this edit provides us with a representative sample of 
LTCHs and IRFs serving Medicare beneficiaries.
    We are using a less stringent measure of Medicare ALOS for IPFs 
whose ALOS is within 30 or 50 percent (depending on the total facility 
ALOS) of the total facility ALOS. This less stringent edit allows us to 
increase our sample size by over 150 reports and produce a cost weight 
more consistent with the overall facility. When developing the FY 1997-
based excluded hospital with capital market basket, the edit we applied 
to IPFs was based on the best available data at the time.
    The detailed cost categories under the residual (that is, the 
remaining portion of the market basket after excluding wages and 
salaries, drugs, and professional liability cost weights) are derived 
from the FY 2002-based IPPS market basket and the 1997 Benchmark I-O 
Tables published by the Bureau of Economic Analysis, U.S. Department of 
Commerce. The FY 2002-based IPPS market basket was developed using FY 
2002 Medicare hospital cost reports with the most recent and detailed 
cost data (70 FR 47388). The 1997 Benchmark I-O is the most recent, 
comprehensive source of cost data for all hospitals. The RPL cost 
weights for benefits, contract labor, and blood and blood products were 
derived using the FY 2002-based IPPS market basket. For example, the 
ratio of the benefit cost weight to the wages and salaries cost weight 
in the FY 2002-based IPPS market basket was applied to the RPL wages 
and salaries cost weight to derive a benefit cost weight for the RPL 
market basket. The remaining RPL operating cost categories were derived 
using the 1997 Benchmark I-O Tables, aged to 2002 using relative price 
changes. (The methodology we used to age the data involves applying the 
annual price changes from the price proxies to the appropriate cost 
categories. We repeat this practice for each year.) Therefore, using 
this methodology, roughly 59 percent of the RPL market basket is 
accounted for by wages, drugs, and PLI data from FY 2002 Medicare cost 
report data for IRFs, IPFs, and LTCHs.
    Comment: Several commenters propose that we regularly re-analyze 
the RPL cost report data, which are the basis of the RPL market basket. 
They note that the methodology used for the RPL market basket includes 
data from the IPPS hospital market basket. These commenters encouraged 
us to work with providers to improve the cost reports from IRFs, IPFs, 
and LTCHs to ensure that the data used for the RPL market basket 
represent only the types of excluded hospitals for which the RPL market 
basket was developed. Furthermore, they believe that improving the data 
reported on the cost reports of IRFs, IPFs, and LTCHs would not only 
refine the RPL market basket but also would improve the accuracy of the 
labor-related share to which the wage index is applied.
    Response: As noted above in this section, we rely on the IPPS 
hospital cost report data to supplement the IRF, IPF, and LTCH Medicare 
cost report

[[Page 27812]]

data for benefits, contract labor, and blood and blood products. For 
example, the ratio of the benefit cost weight to the wages and salaries 
cost weight in the FY 2002-based IPPS market basket is applied to the 
RPL wages and salaries cost weight to derive a benefit cost weight for 
the RPL market basket. We did not directly use the IPPS Medicare cost 
report data, rather we used these data to determine the relationships 
between benefits, contract labor, and blood and blood products with 
wages and salaries. The wages and salaries cost weight in the RPL 
market basket is derived using the IRF, IPF and LTCH Medicare cost 
reports and accounts for 50 percent of the RPL market basket. As noted 
above in this section and as discussed in the RY 2007 LTCH PPS proposed 
rule (71 FR 4660), due to data limitations, this was the best 
methodology for developing the latter cost weights.
    We agree with the commenters that improving the data reported on 
the cost reports of IRFs, IPFs, and LTCHs could improve the RPL market 
basket and labor-related share. We have noticed this data improvement 
on other provider-type cost reports. Therefore, we encourage IRFs, 
IPFs, and LTCHs to fully complete their cost reports; this would help 
us in developing the most complete and accurate market basket possible. 
We will continue to analyze RPL cost report data on a regular basis.
    The following is a summary outlining the choice of the proxies we 
used for the operating portion of the market basket. The price proxies 
for the capital portion are described in more detail in section V.B.3. 
of this preamble. With the exception of the Professional Liability 
proxy, all the price proxies for the operating portion of the RPL 
market basket are based on Bureau of Labor Statistics (BLS) data and 
are grouped into one of the following BLS categories:
     Producer Price Indexes (PPIs) measure price changes for 
goods sold in other than retail markets. PPIs are preferable price 
proxies for goods that hospitals purchase as inputs in producing their 
outputs because the PPIs would better reflect the prices faced by 
hospitals. For example, we will use a special PPI for prescription 
drugs, rather than the Consumer Price Index (CPI) for prescription 
drugs because hospitals generally purchase drugs directly from the 
wholesaler. The PPIs that we use measure price change at the final 
stage of production.
     Consumer Price Indexes (CPIs) measure changes in the 
prices of final goods and services bought by the typical consumer. 
Because they may not represent the price faced by a producer, we use 
CPIs only if an appropriate PPI were not available, or if the 
expenditures were more similar to those of retail consumers in general 
rather than purchases at the wholesale level. For example, the CPI for 
food purchases away from home is used as a proxy for contracted food 
services.
     Employment Cost Indexes (ECIs) measure the rate of change 
in employee wage rates and employer costs for employee benefits per 
hour worked. These indexes are fixed-weight indexes and strictly 
measure the change in wage rates and employee benefits per hour. 
Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Widely accepted statistical methods ensure that the data 
were collected and aggregated in a way that can be replicated. Low 
sampling variability is desirable because it indicates that the sample 
reflects the typical members of the population. (Sampling variability 
is variation that occurs by chance because a sample was surveyed rather 
than the entire population.)
    Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. The market baskets are updated 
quarterly, and therefore, it is important that the underlying price 
proxies be up-to-date, reflecting the most recent data available. We 
believe that using proxies that are published regularly (at least 
quarterly, when possible) helps to ensure that we are using the most 
recent data available to update the market basket. We strive to use 
publications that are disseminated frequently because we believe that 
this is an optimal way to stay abreast of the most current data 
available. Availability means that the proxy is publicly available. We 
prefer that our proxies are publicly available because this will help 
ensure that our market basket updates are as transparent to the public 
as possible. In addition, this enables the public to be able to obtain 
the price proxy data on a regular basis.
    Finally, relevance means that the proxy is applicable and 
representative of the cost category weight to which it is applied. The 
CPIs, PPIs, and ECIs selected by us for this final rule meet these 
criteria. Therefore, we believe that they continue to be the best 
measure of price changes for the cost categories to which they would be 
applied.
    We note that the proxies are the same as those used for the FY 
1997-based excluded hospital with capital market basket, which is 
currently used under the LTCH PPS, and are the same proxies as those 
used for the FY 2002-based excluded hospital market basket that is used 
to update the reasonable cost-based portion of LTCHs' blended 
transition payments (70 FR 47399 through 47403). Because these proxies 
meet our criteria of reliability, timeliness, availability, and 
relevance, we believe they continue to be the best measure of price 
changes for the cost categories. For further discussion on the FY 1997-
based excluded hospital with capital market basket, see the RY 2004 
LTCH PPS final rule (68 FR 34134 through 34136). For further discussion 
on the FY 2002-based excluded hospital market basket, see the FY 2006 
IPPS final rule (70 FR 47400 through 47403).
    Table 2 sets forth the complete 2002-based RPL market basket 
including cost categories, weights, and price proxies for the operating 
portion of the market basket. The price proxies for the capital portion 
are described in more detail in the capital methodology section. For 
comparison purposes, the corresponding FY 1997-based excluded hospital 
with capital market basket, which is currently used under the LTCH PPS, 
is also listed.
    Wages and salaries are 52.895 percent of total costs for the FY 
2002-based RPL market basket compared to 47.335 percent for the FY 
1997-based excluded hospital with capital market basket. Employee 
benefits are 12.982 percent for the FY 2002-based RPL market basket 
compared to 10.244 percent for the FY 1997-based excluded hospital with 
capital market basket. As a result, compensation costs (wages and 
salaries plus employee benefits) for the FY 2002-based RPL market 
basket are 65.877 percent of costs compared to 57.579 percent for the 
FY 1997-based excluded hospital with capital market basket. Of the 8 
percentage-point difference between the compensation shares, 
approximately 3 percentage points are due to the new base year (FY 2002 
instead of FY 1997), 3 percentage points are due to revised LOS edit 
(that is, including only IRFs and LTCHs whose Medicare ALOS is within 
15 percent of the total facility ALOS for the hospital and including 
only IPFs whose Medicare ALOS in within 30 or 50 percent of the total 
facility ALOS), and the remaining 2 percentage points are due to the 
exclusion of other types of IPPS-excluded hospitals (that is, only 
including IPFs, IRFs, and LTCHs in the market basket and excluding 
childrens hospitals, cancer hospitals, and RNCHIs).

[[Page 27813]]



   Table 2.--FY 2002-Based RPL Market Basket Cost Categories, Weights, and Proxies With FY 1997-Based Excluded
                             Hospital With Capital Market Basket Used for Comparison
----------------------------------------------------------------------------------------------------------------
                                              FY 1997-based
                                                excluded      FY 2002-based
             Expense categories               hospital with    RPL market      FY 2002 RPL market basket price
                                             capital market      basket                    proxies
                                                 basket
----------------------------------------------------------------------------------------------------------------
Total......................................         100.000         100.000
        Compensation.......................          57.579          65.877
    Wages and Salaries *...................          47.335          52.895  ECI--Wages and Salaries, Civilian
                                                                              Hospital Workers.
    Employee Benefits *....................          10.244          12.982  ECI--Benefits, Civilian Hospital
                                                                              Workers.
Professional Fees, Non-Medical.............           4.423           2.892  ECI--Compensation for Professional,
                                                                              Specialty & Technical Workers.
Utilities..................................           1.180           0.656
    Electricity............................           0.726           0.351  PPI--Commercial Electric Power.
    Fuel Oil, Coal, etc....................           0.248           0.108  PPI--Refined Petroleum Products.
    Water and Sewage.......................           0.206           0.197  CPI-U--Water & Sewage Maintenance.
Professional Liability Insurance...........           0.733           1.161  CMS Professional Liability Premium
                                                                              Index.
All Other Products and Services............          27.117          19.265
    All Other Products.....................          17.914          13.323
    Pharmaceuticals........................           6.318           5.103  PPI Prescription Drugs.
    Food: Direct Purchase..................           1.122           0.873  PPI Processed Foods & Feeds.
    Food: Contract Service.................           1.043           0.620  CPI--U Food Away From Home.
    Chemicals..............................           2.133           1.100  PPI Industrial Chemicals.
    Blood and Blood Products **............           0.748
    Medical Instruments....................           1.795           1.014  PPI Medical Instruments &
                                                                              Equipment.
    Photographic Supplies..................           0.167           0.096  PPI Photographic Supplies.
    Rubber and Plastics....................           1.366           1.052  PPI Rubber & Plastic Products.
    Paper Products.........................           1.110           1.000  PPI Converted Paper & Paperboard
                                                                              Products.
    Apparel................................           0.478           0.207  PPI Apparel.
    Machinery and Equipment................           0.852           0.297  PPI Machinery & Equipment.
    Miscellaneous Products.................           0.783           1.963  PPI Finished Goods less Food &
                                                                              Energy.
All Other Services.........................           9.203           5.942
    Telephone..............................           0.348           0.240  CPI-U Telephone Services.
    Postage................................           0.702           0.682  CPI-U Postage.
    All Other: Labor Intensive.............           4.453           2.219  ECI--Compensation for Private
                                                                              Service Occupations.
    All Other: Non-labor Intensive.........           3.700           2.800  CPI-U All Items.
Capital-Related Costs......................           8.968          10.149
    Depreciation...........................           5.586           6.186
    Fixed Assets...........................           3.503           4.250  Boeckh Institutional Construction
                                                                              23-year useful life.
    Movable Equipment......................           2.083           1.937  WPI Machinery & Equipment 11-year
                                                                              useful life.
    Interest Costs.........................           2.682           2.775
    Nonprofit..............................           2.280           2.081  Average yield on domestic municipal
                                                                              bonds (source: Moody's Aaa bonds
                                                                              vintage).
    For Profit.............................           0.402           0.694  Average yield on Moody's AAA bonds
                                                                              vintage weighted (23 years).
    Other Capital-Related Costs............           0.699           1.187  CPI-U Residential Rent.
----------------------------------------------------------------------------------------------------------------
* Labor-related.
** Blood and blood-related products are included in miscellaneous products.
Note: Due to rounding, weights may not sum to total.

    The following is an explanation of the expense categories from 
Table 2.
a. Wages and Salaries
    For measuring the price growth of wages in the FY 2002-based RPL 
market basket, consistent with our proposal, we will use the ECI for 
wages and salaries for civilian hospital workers as the proxy for wages 
in the RPL market basket. The RPL market basket uses the BLS' 
Employment Cost Indexes (ECIs) as proxies for wages and salaries, and 
benefits for civilian industry workers classified in the Standard 
Industrial Code (SIC) 806, Hospitals. However, beginning April 28, 
2006, with the publication of March 2006 data, the ECIs will be 
converted from the SIC system to the North American Industrial 
Classification System (NAICS). The NAICS-based ECI for hospitals (NAICS 
622) is similar (at least 90 percent identical) to the SIC-based ECI 
for hospitals. Therefore, when they are available, we will use the 
NAICS-based ECIs for hospitals as proxies to reflect the rate-of-price 
change for the wages and salaries and employee benefits cost categories 
in the 2002-based RPL market basket. The RPL market basket and labor-
related share in this final rule will use the most recent data 
available from BLS. We do not expect the RPL market basket and labor-
related share to change significantly when the conversion from the SIC 
system to the NAICS system takes place.
b. Employee Benefits
    The FY 2002-based RPL market basket uses the ECI for employee 
benefits for civilian hospital workers.
c. Nonmedical Professional Fees
    The ECI for compensation for professional and technical workers in 
private industry will be applied to this category since it includes 
occupations such as management and consulting, legal, accounting, and 
engineering services.
d. Fuel, Oil, Coal, and Gasoline
    The percentage change in the price of gas fuels as measured by the 
PPI (Commodity Code 0552) will be applied to this component.

[[Page 27814]]

e. Electricity
    The percentage change in the price of commercial electric power as 
measured by the PPI (Commodity Code 0542) will be applied to 
this component.
f. Water and Sewage
    The percentage change in the price of water and sewage maintenance 
as measured by the CPI for all urban consumers (CPI Code 
CUUR0000SEHG01) will be applied to this component.
g. Professional Liability Insurance (PLI)
    The FY 2002-based RPL market basket will use the percentage change 
in hospital PLI premiums as estimated by the CMS Hospital Professional 
Liability Index for the proxy of this category. In the FY 1997-based 
excluded hospital with capital market basket, the same proxy was used. 
We continue to research options for improving our proxy for PLI. This 
research includes exploring various options for expanding our current 
survey, including the identification of another entity that will be 
willing to work with us to collect more complete and comprehensive 
data. We are also exploring other options such as third party or 
industry data that might assist us in creating a more precise measure 
of PLI premiums. At this time, we have not identified a preferred 
option, therefore there is no change in the proxy in this final rule.
h. Pharmaceuticals
    The percentage change in the price of prescription drugs as 
measured by the PPI (PPI Code PPI32541DRX) will be used as a 
proxy for this cost category. This is a special index produced by BLS 
as a proxy in the 1997-based excluded hospital with capital market 
basket.
i. Food: Direct Purchases
    The percentage change in the price of processed foods and feeds as 
measured by the PPI (Commodity Code 02) will be applied to 
this component.
j. Food: Contract Service
    The percentage change in the price of food purchased away from home 
as measured by the CPI for all urban consumers (CPI Code 
CUUR0000SEFV) will be applied to this component.
k. Chemicals
    The percentage change in the price of industrial chemical products 
as measured by the PPI (Commodity Code 061) will be applied to 
this component. While the chemicals hospitals purchase include 
industrial as well as other types of chemicals, the industrial 
chemicals component constitutes the largest proportion by far. Thus we 
believe that Commodity Code 061 is the appropriate proxy.
l. Medical Instruments
    The percentage change in the price of medical and surgical 
instruments as measured by the PPI (Commodity Code 1562) will 
be applied to this component.
m. Photographic Supplies
    The percentage change in the price of photographic supplies as 
measured by the PPI (Commodity Code 1542) will be applied to 
this component.
n. Rubber and Plastics
    The percentage change in the price of rubber and plastic products 
as measured by the PPI (Commodity Code 07) will be applied to 
this component.
o. Paper Products
    The percentage change in the price of converted paper and 
paperboard products as measured by the PPI (Commodity Code 
0915) will be used.
p. Apparel
    The percentage change in the price of apparel as measured by the 
PPI (Commodity Code 381) will be applied to this component.
q. Machinery and Equipment
    The percentage change in the price of machinery and equipment as 
measured by the PPI (Commodity Code 11) will be applied to 
this component.
r. Miscellaneous Products
    The percentage change in the price of all finished goods less food 
and energy as measured by the PPI (Commodity Code SOP3500) 
will be applied to this component. Using this index will remove the 
double-counting of food and energy prices, which are captured elsewhere 
in the market basket. The weight for this cost category is higher, in 
part, than in the 1997-based index because the weight for blood and 
blood products (1.188) is added to it. In the 1997-based excluded 
hospital with capital market basket, we included a separate cost 
category for blood and blood products, using the BLS PPI for blood and 
derivatives as a price proxy. A review of recent trends in the PPI for 
blood and derivatives suggests that its movements may not be consistent 
with the trends in blood costs faced by hospitals. While this proxy did 
not match exactly with the products hospitals are buying, its trend 
over time appears to be reflective of the historical price changes of 
blood purchased by hospitals. However, an apparent divergence between 
the BLS PPI for blood and derivatives and trends in blood costs faced 
by hospitals over recent years led us to reevaluate whether the PPI for 
blood and derivatives was an appropriate measure of the changing price 
of blood. As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 
4663), we ran test market baskets classifying blood into three separate 
cost categories: Blood and blood products; contained within chemicals 
as was done for the 1992-based excluded hospital with capital market 
basket; and, within miscellaneous products. These categories use as 
proxies the following PPIs: The PPI for blood and blood products, the 
PPI for chemicals, and the PPI for finished goods less food and energy, 
respectively. Of these three proxies, the PPI for finished goods less 
food and energy moved most like the recent blood cost and price trends. 
In addition, the impact on the overall market basket by using different 
proxies for blood was negligible, mostly due to the relatively small 
weight for blood in the market basket.
    Therefore, we are using the PPI for finished goods less food and 
energy for the blood proxy because we believe it more appropriately 
proxies price changes (not quantities or required tests) associated 
with blood purchased by hospitals because it moved most like the recent 
blood cost and price trends. (We note that we will continue to evaluate 
this proxy for its appropriateness and will explore the development of 
alternative price indexes to proxy the price changes associated with 
this cost for presentation in a future proposed rule.)
s. Telephone
    The percentage change in the price of telephone services as 
measured by the CPI for all urban consumers (CPI Code 
CUUR0000SEED) will be applied to this component.
t. Postage
    The percentage change in the price of postage as measured by the 
CPI for all urban consumers (CPI Code CUUR0000SEEC01) will be 
applied to this component.
u. All Other Services, Labor Intensive
    The percentage change in the ECI for compensation paid to service 
workers employed in private industry will be applied to this component.
v. All Other Services, Nonlabor Intensive
    The percentage change in the all items component of the CPI for all 
urban

[[Page 27815]]

consumers (CPI Code CUUR0000SA0) will be applied to this 
component.
3. Methodology for the Capital Portion of the RPL Market Basket
    Unlike for the operating costs of the FY 2002-based RPL market 
basket, we do not have IRF, IPF, and LTCH FY 2002 Medicare cost report 
data for the capital cost weights, due to a change in the FY 2002 
reporting requirements. Rather, as we proposed, in this final rule we 
used these hospitals' expenditure data for the capital cost categories 
of depreciation, interest, and other capital expenses for FY 2001, and 
age the data to a FY 2002 base year using relevant price proxies. As 
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4663), we 
believe this is the best approach since these data are the most similar 
to the capital cost structures of those IRFs, IPFs, and LTCHs serving 
Medicare beneficiaries that require inpatient hospital services.
    As we proposed, in this final rule we calculated weights for the 
RPL market basket capital costs using the same set of Medicare cost 
reports used to develop the operating share for IRFs, IPFS, and LTCHs 
in order to use consistent expense data in developing the weights for 
both operating and capital costs. The resulting capital weight for the 
FY 2002 base year is 10.149 percent. This is based on FY 2001 Medicare 
cost report data for IRFs, IPFs, and LTCHs, aged to FY 2002 using 
relevant price proxies.
    Lease expenses are not a separate cost category in the market 
basket, but are distributed among the cost categories of depreciation, 
interest, and other, reflecting the assumption that the underlying cost 
structure of leases is similar to capital costs in general. As 
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4664), we assume 
10 percent of lease expenses are overhead and assigned them to the 
other capital expenses cost category as overhead. We base this 
assignment of 10 percent of lease expenses to overhead on the common 
assumption that overhead is 10 percent of costs. The remaining lease 
expenses are distributed to the three cost categories based on the 
weights of depreciation, interest, and other capital expenses not 
including lease expenses.
    Depreciation contains two subcategories: Building and fixed 
equipment, and movable equipment. The split between building and fixed 
equipment and movable equipment was determined using the FY 2001 
Medicare cost reports for IRFs, IPFs, and LTCHs. As explained in the RY 
2007 LTCH PPS proposed rule (71 FR 4664), we believe this is the best 
available data source because it reflects the capital cost structures 
of those IRFs, IPFs, and LTCHs serving Medicare beneficiaries. In the 
FY 2003 IPPS final rule, we also used this methodology to compute the 
1997-based index (August 1, 2002; 67 FR 50044).
    The total interest expense cost category is split between the 
government/nonprofit and for-profit hospitals. The 1997-based excluded 
hospital with capital market basket allocated 85 percent of the total 
interest cost weight to the government nonprofit interest, proxied by 
average yield on domestic municipal bonds, and 15 percent to for-profit 
interest, proxied by average yield on Moody's Aaa bonds.
    As we proposed, for this final rule we derive the split using the 
relative FY 2001 Medicare cost report data for PPS hospitals on 
interest expenses for the government/nonprofit and for-profit 
hospitals. Due to insufficient Medicare cost report data for IPFs, 
IRFs, and LTCHs, we used the same split used in the IPPS capital input 
price index, which is 75 percent of the total interest cost weight of 
the government/non-profit interest and 25 percent of for-profit 
interest. As explained in the RY 2007 LTCH PPS proposed rule (71 FR 
4664), we believe that this split reflects the latest relative cost 
structure of interest expenses for hospitals because it is based on the 
most recent complete hospital cost report data and, therefore, we use a 
75-25 split to allocate interest expenses to government/nonprofit and 
for-profit hospitals' interest as stated in the FY 2006 IPPS final rule 
(70 FR 47408).
    Since capital is acquired and paid for over time, capital expenses 
in any given year are determined by both past and present purchases of 
physical and financial capital. The vintage-weighted capital index is 
intended to capture the long-term consumption of capital, using vintage 
weights for depreciation (physical capital) and interest (financial 
capital). These vintage weights reflect the purchase patterns of 
building and fixed equipment and movable equipment over time. 
Depreciation and interest expenses are determined by the amount of past 
and current capital purchases. Therefore, we are using the vintage 
weights to compute vintage-weighted price changes associated with 
depreciation and interest expense.
    Vintage weights are an integral part of the FY 2002-based RPL 
market basket. Capital costs are inherently complicated and are 
determined by complex capital purchasing decisions, over time, based on 
factors such as interest rates and debt financing. In addition, capital 
is depreciated over time instead of being consumed in the same period 
it is purchased. The capital portion of the FY 2002-based RPL market 
basket reflects the annual price changes associated with capital costs, 
and is a useful simplification of the actual capital investment 
process. As explained in the RY 2007 LTCH PPS proposed rule (71 FR 
4664), by accounting for the vintage nature of capital, we are able to 
provide an accurate, stable annual measure of price changes. Annual 
nonvintage price changes for capital are unstable due to the volatility 
of interest rate changes. Therefore, they do not reflect the actual 
annual price changes for Medicare capital-related costs. The capital 
component of the FY 2002-based RPL market basket will reflect the 
underlying stability of the capital acquisition process and provide 
hospitals with the ability to plan for changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we need a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides the best time series of capital purchases by hospitals for all 
of the above components of capital purchases. As explained in the RY 
2007 LTCH PPS proposed rule (71 FR 4664), the early Medicare Cost 
Reports are not sufficiently completed to have capital data to meet 
this need. While the AHA Panel Survey provides a consistent database 
back to 1963, it does not provide annual capital purchases. However, 
the AHA Panel Survey provides a time series of depreciation expenses 
through 1997, which could be used to infer capital purchases over time. 
From 1998 to 2001, hospital depreciation expenses were calculated by 
multiplying the AHA Annual Survey total hospital expenses by the ratio 
of depreciation to total hospital expenses from the Medicare cost 
reports. Beginning in 2001, the AHA Annual Survey began collecting 
depreciation expenses. We note that we hope to be able to propose to 
use these data in proposed rebasings that would be presented in future 
proposed rules.
    In order to estimate capital purchases from AHA data on 
depreciation and interest expenses, the expected life for each cost 
category (building and fixed equipment, movable equipment, and debt 
instruments) is needed. Due to insufficient Medicare cost report data 
for IPFs, IRFs, and LTCHs, we use FY 2001 Medicare Cost Reports for 
IPPS hospitals to determine the expected life of building and fixed 
equipment and movable equipment. As explained in the RY 2007 LTCH PPS 
proposed rule (71 FR 4664), we believe this data source

[[Page 27816]]

reflects the latest relative cost structure of depreciation expenses 
for all hospital types, including IPFs, IRFs, and LTCHs, and is the 
best available data at this time. The expected life of any piece of 
equipment can be determined by dividing the value of the asset 
(excluding fully depreciated assets) by its current year depreciation 
amount. This calculation yields the estimated useful life of an asset 
if depreciation were to continue at current year levels, assuming 
straight-line depreciation. From the FY 2001 Medicare cost reports for 
IPPS hospitals, the expected life of building and fixed equipment was 
determined to be 23 years, and the expected life of movable equipment 
was determined to be 11 years.
    As we proposed, for this final rule we also used the fixed and 
movable weights derived from FY 2001 Medicare cost reports for IPFs, 
IRFs, and LTCHs to separate the depreciation expenses into annual 
amounts of building and fixed equipment depreciation and movable 
equipment depreciation because this is the best available data source. 
By multiplying the annual depreciation amounts by the expected life 
calculations from the FY 2001 Medicare cost reports, year-end asset 
costs for building and fixed equipment and movable equipment are 
determined. Then, we calculate a time series back to 1963 of annual 
capital purchases by subtracting the previous year asset costs from the 
current year asset costs. From this capital purchase time series we are 
able to calculate the vintage weights for building and fixed equipment, 
movable equipment, and debt instruments. An explanation of each of 
these sets of vintage weights follows.
    As we proposed, for this final rule for building and fixed 
equipment vintage weights, the real annual capital purchase amounts for 
building and fixed equipment derived from the AHA Panel Survey are 
used. The real annual purchase amount was used to capture the actual 
amount of the physical acquisition, net of the effect of price 
inflation. This real annual purchase amount for building and fixed 
equipment was produced by deflating the nominal annual purchase amount 
by the building and fixed equipment price proxy, the Boeckh 
Institutional Construction Index. This is the same proxy used for the 
FY 1997-based excluded hospital with capital market basket. As 
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4664), we 
believe this proxy continues to meet our criteria of reliability, 
timeliness, availability, and relevance (discussed previously in this 
final rule). Since building and fixed equipment has an expected life of 
23 years, the vintage weights for building and fixed equipment are 
deemed to represent the average purchase pattern of building and fixed 
equipment over 23-year periods. With real building and fixed equipment 
purchase estimates back to 1963, 16 23-year periods could be averaged 
to determine the average vintage weights for building and fixed 
equipment that are representative of average building and fixed 
equipment purchase patterns over time. Vintage weights for each 23-year 
period are calculated by dividing the real building and fixed capital 
purchase amount in any given year by the total amount of purchases in 
the 23-year period. This calculation is done for each year in the 23-
year period, and for each of the 16 23-year periods. The average of 
each year across the 16 23-year periods is used to determine the 2002 
average building and fixed equipment vintage weights.
    For movable equipment vintage weights, as we proposed, for this 
final rule the real annual capital purchase amounts for movable 
equipment derived from the AHA Panel Survey are used to capture the 
actual amount of the physical acquisition, net of price inflation. This 
real annual purchase amount for movable equipment is calculated by 
deflating the nominal annual purchase amount by the movable equipment 
price proxy, the PPI for Machinery and Equipment. This is the same 
proxy used for the FY 1997-based excluded hospital with capital market 
basket. We believe this proxy, which meets our criteria, is the best 
measure of price changes for this cost category. Since movable 
equipment has an expected life of 11 years, the vintage weights for 
movable equipment are deemed to represent the average purchase pattern 
of movable equipment over an 11-year period. With real movable 
equipment purchase estimates available back to 1963, 28 11-year periods 
could be averaged to determine the average vintage weights for movable 
equipment that are representative of average movable equipment purchase 
patterns over time. Vintage weights for each 11-year period are 
calculated by dividing the real movable capital purchase amount for any 
given year by the total amount of purchases in the 11-year period. This 
calculation is done for each year in the 11-year period, and for each 
of the 28 11-year periods. The average of the 28 11-year periods is 
used to determine the FY 2002 average movable equipment vintage 
weights.
    As we proposed, for this final rule for interest vintage weights, 
the nominal annual capital purchase amounts for total equipment 
(building and fixed, and movable) derived from the AHA Panel and Annual 
Surveys are used. Nominal annual purchase amounts are used to capture 
the value of the debt instrument. Since hospital debt instruments have 
an expected life of 23 years, the vintage weights for interest are 
deemed to represent the average purchase pattern of total equipment 
over 23-year periods. With nominal total equipment purchase estimates 
available back to 1963, 16 23-year periods could be averaged to 
determine the average vintage weights for interest that are 
representative of average capital purchase patterns over time. Vintage 
weights for each 23-year period are calculated by dividing the nominal 
total capital purchase amount for any given year by the total amount of 
purchases in the 23-year period. This calculation is done for each year 
in the 23-year period and for each of the 16 23-year periods. The 
average of the 16 23-year periods is used to determine the FY 2002 
average interest vintage weights. The vintage weights for the index are 
presented in Table 3.
    In addition to the price proxies for depreciation and interest 
costs described above in the vintage weighted capital section, as we 
proposed, for this final rule we used the CPI-U for Residential Rent as 
a price proxy for other capital-related costs. Other capital-related 
costs are mainly composed of taxes and insurance. There is no price 
proxy for these specific costs; however, we believe the price changes 
associated with these costs will be reflected in the price changes of 
residential rent because rent is assumed to move with taxes and 
insurance in order to maintain profit margins. The price proxies for 
each of the capital cost categories are the same as those used for the 
FY 2003 IPPS final rule (67 FR 50044) capital input price index.

[[Page 27817]]



                      Table 3.--CMS FY 2002-Based RPL Market Basket Capital Vintage Weights
----------------------------------------------------------------------------------------------------------------
                                                                                                     Interest:
                                                                   Fixed assets       Movable        capital-
                              Year                                   (23 year       assets  (11    related  (23
                                                                     weights)      year weights)   year weights)
----------------------------------------------------------------------------------------------------------------
1...............................................................           0.021           0.065           0.010
2...............................................................           0.022           0.071           0.012
3...............................................................           0.025           0.077           0.014
4...............................................................           0.027           0.082           0.016
5...............................................................           0.029           0.086           0.019
6...............................................................           0.031           0.091           0.023
7...............................................................           0.033           0.095           0.026
8...............................................................           0.035           0.100           0.029
9...............................................................           0.038           0.106           0.033
10..............................................................           0.040           0.112           0.036
11..............................................................           0.042           0.117           0.039
12..............................................................           0.045  ..............           0.043
13..............................................................           0.047  ..............           0.048
14..............................................................           0.049  ..............           0.053
15..............................................................           0.051  ..............           0.056
16..............................................................           0.053  ..............           0.059
17..............................................................           0.056  ..............           0.062
18..............................................................           0.057  ..............           0.064
19..............................................................           0.058  ..............           0.066
20..............................................................           0.060  ..............           0.070
21..............................................................           0.060  ..............           0.071
22..............................................................           0.061  ..............           0.074
23..............................................................           0.061  ..............           0.076
                                                                 -----------------------------------------------
    Total.......................................................           1.000           1.000           1.000
----------------------------------------------------------------------------------------------------------------

4. Market Basket Estimate for the 2007 LTCH PPS Rate Year
    As discussed previously in this final rule, beginning in the 2007 
LTCH PPS rate year, we are adopting the FY 2002-based RPL market basket 
as the appropriate market basket of goods and services under the LTCH 
PPS. As discussed in greater detail below, we are implementing the 
proposed zero percent reduction to the LTCH PPS Federal rate for the 
2007 LTCH PPS rate year as discussed in the RY 2007 LTCH PPS proposed 
rule (71 FR 4667 through 4670), rather than using an update based 
solely on the most recent estimate of the LTCH PPS market basket as we 
have done in the past. In addition, as we discuss in section V.D.1.c. 
of this preamble, as we proposed, for this final rule we are revising 
the LTCH PPS labor-related share based on the RPL market basket. In 
Table 4, we are presenting a comparison of the most recent estimates of 
the increase to the current LTCH PPS market basket (that is, the FY 
1997-based excluded hospital with capital market basket) and the FY 
2002-based RPL market basket.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4666), the most recent 
estimate of the RPL market basket at that time for July 1, 2006 through 
June 30, 2007 (the 2007 LTCH PPS rate year) was 3.6 percent, which was 
based on Global Insight's 3rd quarter 2005 forecast with history 
through the 2nd quarter of 2005. In this final rule, consistent with 
our historical practice of using the most recent available data, based 
on Global Insight's 1st quarter 2006 forecast with history through the 
4th quarter of 2005, the most recent estimate of the RPL market basket 
for July 1, 2006 through June 30, 2007 (the 2007 LTCH PPS rate year) is 
3.4 percent. Global Insight, Inc. is a nationally recognized economic 
and financial forecasting firm that contracts with CMS to forecast the 
components of the market baskets. Using the current FY 1997-based 
excluded hospital with capital market basket, Global Insight's 1st 
quarter 2006 forecast, with history through the 4th quarter of 2005, 
for the 2007 LTCH PPS rate year is also 3.4 percent. Table 4 compares 
the FY 2002-based RPL market basket and the FY 1997-based excluded 
hospital with capital market basket percent changes. For both the 
historical and forecasted periods between FY 2000 and FY 2008, the 
difference between the two market baskets is minor with the exception 
of FY 2002, where the FY 2002-based RPL market basket increased \3/10\ 
of a percentage point higher than the FY 1997-based excluded hospital 
with capital market basket. This is primarily due to the FY 2002-based 
RPL having a larger compensation (that is, the sum of wages and 
salaries and benefits) cost weight than the FY 1997-based index and the 
price changes associated with compensation costs increasing much faster 
than the prices of other market basket components. Also contributing is 
the ``all other nonlabor intensive'' cost weight, which is smaller in 
the FY 2002-based RPL market basket than in the FY 1997-based index, as 
well as the slower price changes associated with these costs.

[[Page 27818]]



  Table 4.--FY 2002-Based RPL Market Basket and FY 1997-Based Excluded
     Hospital with Capital Market Basket, Percent Changes: 2000-2008
------------------------------------------------------------------------
                                                          FY 1997-based
                                      Rebased FY 2002-      excluded
          Fiscal year (FY)            based RPL market   hospital market
                                           basket          basket with
                                                             capital
------------------------------------------------------------------------
Historical data:
    RY 2001.........................               3.8               3.9
    RY 2002.........................               4.1               3.8
    RY 2003.........................               3.8               3.7
    RY 2004.........................               3.6               3.6
    RY 2005.........................               3.8               4.0
        Average RY 2001-2005........               3.8               3.8
Forecast:
    RY 2006.........................               3.6               3.8
    RY 2007.........................               3.4               3.4
    RY 2008.........................               3.2               3.1
    RY 2009.........................               2.9               2.8
        Average RY 2006-2009........               3.3              3.3
------------------------------------------------------------------------
Source: Global Insight, Inc. 1st Qtr 2006, @USMACRO/CNTL0306 @CISSIM/
  CNTL08R3.SIM

C. Standard Federal Rate for the 2007 LTCH PPS Rate Year

1. Background
    Under the existing regulations at Sec.  412.523(c)(3)(ii), we 
update the standard Federal rate annually to adjust for the most recent 
estimate of the projected increases in prices for LTCH inpatient 
hospital services. We established this regulation in the August 30, 
2002 final rule (67 FR 56030), which implemented the LTCH PPS, because 
at that time we believed that was the most appropriate method for 
updating the LTCH PPS Standard Federal rate annually for years after FY 
2003. When we moved the date of the annual update of the LTCH PPS from 
October 1 to July 1 in the RY 2004 LTCH PPS final rule (68 FR 34138), 
we revised Sec.  412.523(c)(3) to specify that for LTCH PPS rate years 
beginning on or after July 1, 2003, the annual update to the standard 
Federal rate for the LTCH PPS would be equal to the previous rate 
year's Federal rate updated by the most recent estimate of increases in 
the appropriate market basket of goods and services included in covered 
inpatient LTCH services because, at that time, we continued to believe 
that was the most appropriate method for updating the LTCH PPS Standard 
Federal rate annually for years after RY 2004. As established in the RY 
2006 LTCH PPS final rule (70 FR 24179), based on the most recent 
estimate of the excluded hospital with capital market basket, adjusted 
to account for the change in the LTCH PPS rate year update cycle, the 
current LTCH PPS standard Federal rate which is effective from July 1, 
2005 through June 30, 2006 (the 2006 LTCH PPS rate year) is $38,086.04.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4667 through 4670), we 
explain how we developed the proposed standard Federal rate for the 
2007 LTCH PPS rate year. Specifically, we explained our rationale, 
which was based on our ongoing monitoring activities, for proposing a 
zero percent update to the standard Federal rate for the 2007 LTCH PPS 
rate year, which was based on the most recent estimate in the RPL 
market basket offset by an adjustment for changes in coding practices, 
rather than proposing to solely use the most recent estimate of the 
proposed RPL market basket as the update factor for the Federal rate 
for the upcoming rate year. Therefore, in that proposed rule, we 
proposed a standard Federal rate for the 2007 LTCH PPS rate year of 
$38,086.04. In the discussion that follows, we explain how we developed 
the final standard Federal rate for the 2007 LTCH PPS rate year. 
Specifically, we explain our rationale, which is based on our ongoing 
monitoring activities, for the zero percent update to the standard 
Federal rate for the 2007 LTCH PPS rate year, which is based on the 
most recent estimate in the RPL market basket offset by an adjustment 
for changes in coding practices as discussed in greater detail below, 
rather than solely using the most recent estimate of the RPL market 
basket as the update factor for the Federal rate for the upcoming rate 
year. Thus, the standard Federal rate for the 2007 LTCH PPS rate year 
will be $38,086.04.
2. Description of a Preliminary Model of an Update Framework Under the 
LTCH PPS
    In the August 30, 2002 final rule (67 FR 56086), which implemented 
the LTCH PPS, we stated that in the future we may propose to develop a 
framework to update payments to LTCHs that would account for other 
appropriate factors that affect the efficient delivery of services and 
care provided to Medicare patients. A conceptual basis for the proposal 
of developing an update framework in the future was presented in 
Appendix B of that same final rule (67 FR 56086). In subsequent final 
rules that updated the LTCH PPS standard Federal rate for years after 
FY 2003, we explained that we did not propose an update framework 
because we had not yet collected sufficient data to allow for the 
analysis and development of a framework under the LTCH PPS (see 68 FR 
34134, 69 FR 25682, and 70 FR 24179). Since the LTCH PPS was 
implemented just slightly over 3 years ago (for cost reporting periods 
beginning on or after October 1, 2002) and due to the time lag in the 
availability of Medicare data, we continue to believe that we still do 
not yet have sufficient data to develop an update framework upon which 
to base the update to the standard Federal rate for the 2007 LTCH PPS 
rate year.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667), 
although we do not have enough complete data at this time to update for 
RY 2007 based on an update framework, we believe that the almost 2 full 
years of data generated under the LTCH PPS is sufficient data to begin 
the discussion of the development of a potential update framework that 
we may propose to use in the future under the LTCH PPS for the annual 
update to the LTCH standard Federal rate. Therefore, although we did 
not propose to employ an analytical update framework in that proposed 
rule to determine the 2007 LTCH PPS rate year update to the standard 
Federal rate,

[[Page 27819]]

we presented a preliminary model of an update framework, using the best 
available data and concepts, in Appendix A of that proposed rule, which 
we may propose to adopt at some time in the future under the LTCH PPS. 
Furthermore, in the RY 2007 LTCH PPS proposed rule, we solicited 
comments on that preliminary update framework methodology and its 
application, which we may propose to adopt at some time in the future 
under the LTCH PPS. Also, we stated that we would appreciate comments 
regarding recommendations to improve it.
    We received a few comments on the preliminary model of an update 
framework that was presented in Appendix A of the RY 2007 LTCH PPS 
proposed rule (71 FR 4742 through 4747). In this final rule, we are 
again presenting a preliminary model of an update framework, using the 
best available data and concepts, which we may propose to adopt at some 
time in the future under the LTCH PPS, in Appendix A of this final 
rule. We have responded to the comments that we received on the 
preliminary update framework model presented in the RY 2007 LTCH PPS 
proposed rule in Appendix A of this final rule. We continue to solicit 
comments on this preliminary update framework methodology and its 
application, which we may propose to adopt at some time in the future 
under the LTCH PPS. Also, we would appreciate comments regarding 
recommendations to improve it. We note that this preliminary model of 
an update framework for the LTCH PPS is based on the conceptual 
discussion of a LTCH PPS update framework that was presented in the 
August 30, 2002 final rule (67 FR 56086), and is similar to the update 
framework formerly used to develop the operating IPPS annual update 
recommendation (69 FR 28816 through 28817) and that which is currently 
used under the capital IPPS for inpatient short-term acute-care 
hospitals set forth at Sec.  412.308(c)(1)(ii).
3. Update to the Standard Federal Rate for the 2007 LTCH PPS Rate Year
    Currently, under Sec.  412.523, the annual update to the LTCH PPS 
standard Federal rate is equal to the most recent estimate of increases 
in the prices of an appropriate market basket of goods and services 
included in covered inpatient LTCH services (that is, presently, the 
excluded hospital with capital market basket). As we indicated in 
previous LTCH PPS final rules (67 FR 56014, 68 FR 34157, 69 FR 25712, 
and 70 FR 24209 through 24213) and in the RY 2007 LTCH PPS proposed 
rule (71 FR 4667), we have developed a monitoring system to assist us 
in evaluating the LTCH PPS. We have used the results of these 
monitoring efforts, along with the most recently available LTCH PPS 
data to assess current payment adequacy under the LTCH PPS.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667 
through 4670), because we believe that current payments are more than 
adequate to account for price increases in the services furnished by 
LTCHs during the 2007 LTCH PPS rate year, under the broad authority 
conferred upon the Secretary by section 123 of the BBRA as amended by 
section 307(b) of the BIPA to include appropriate adjustments, 
including updates, in the establishment of the LTCH PPS, we proposed to 
revise Sec.  412.523(c)(3)(ii), to specify that, for discharges 
occurring on or after July 1, 2006 and on or before June 30, 2007, the 
standard Federal rate from the previous year would be updated by a 
factor of zero percent. That is, the standard Federal rate for RY 2007 
rate year would remain the same as the standard Federal rate in effect 
during the 2006 rate year ($38,086.04).
    In this final rule, as we discuss in greater detail below, because 
we continue to believe that current payments are more than adequate to 
account for price increases in the services furnished by LTCHs during 
the 2007 LTCH PPS rate year, under the broad authority conferred upon 
the Secretary by section 123 of the BBRA as amended by section 307(b) 
of the BIPA to include appropriate adjustments, including updates, in 
the establishment of the LTCH PPS, we are revising Sec.  
412.523(c)(3)(ii), to specify that, for discharges occurring on or 
after July 1, 2006 and on or before June 30, 2007, there will be a zero 
percent update to the standard Federal rate from the previous year. 
That is, the standard Federal rate for the July 1, 2006 through June 
30, 2007 rate year will be $38,086.04.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4667), 
and in the August 30, 2002 final rule (67 FR 56014), we describe an on-
going monitoring component of the new LTCH PPS that would enable us to 
evaluate the impact of the new payment policies. We stated that, if our 
data indicate that changes to the system might be warranted, we may 
consider proposing revisions to these policies in the future. Since the 
implementation of the LTCH PPS (for cost reporting periods beginning on 
or after October 1, 2002), there has been tremendous growth in the 
number of LTCHs reimbursed by Medicare. Specifically, the number of 
LTCHs has almost doubled over the past 3 years from approximately 200 
LTCHs in FY 2003 to 378 LTCHs at the start of FY 2005. In addition, 
Medicare spending for LTCHs has also grown rapidly, as noted in 
MedPAC's June 2004 Report to Congress (page 122). Rapid increases in 
LTCH growth and Medicare spending under the LTCH PPS, in conjunction 
with the fact that over 98 percent of LTCHs are currently paid based 
fully on the Federal rate (rather than choosing to be paid under a 
blend of the reasonable cost-based (TEFRA) payment amount and the LTCH 
PPS Federal rate payment amount), prompted us to examine changes in 
LTCHs' patient case-mix index (CMI) and margins under the LTCH PPS. As 
discussed in greater detail in the RY 2007 LTCH PPS proposed rule (71 
FR 4667 through 4670), we believe the proposed zero percent update 
factor for RY 2007, which was based on the most recent estimate of the 
proposed RPL market basket at that time, adjusted to account for coding 
improvements, is supported by our findings regarding CMI, Medicare 
margins, and patient census based on the most recent complete LTCH 
data.
    A LTCH's CMI is defined as its case weighted average LTC-DRG 
relative weight for all its discharges in a given period. Changes in 
CMI consist of two components: ``Real'' CMI changes and ``apparent'' 
CMI changes. Real CMI increase is defined as the increase in the 
average LTC-DRG relative weights resulting from the hospital's 
treatment of more resource intensive patients. Apparent CMI increase is 
defined as the increase in CMI due to changes in coding practices. 
Observed CMI increase is defined as real CMI increase plus the increase 
in computed CMI due to changes in coding practices (including better 
documentation of the medical record by physicians and more complete 
coding of the medical record by coders). If LTCH patients have more 
costly impairments, lower functional status, or increased 
comorbidities, and thus require more resources in the LTCH, we will 
consider this a real change in case-mix. Conversely, if LTCH patients 
have the same impairments, functional status, and comorbidities but are 
coded differently resulting in higher payment, we consider this an 
apparent change in case-mix. We believe that changes in payment rates 
should accurately reflect changes in LTCHs' true cost of treating 
patients (real CMI increase), and should not be influenced by changes 
in coding practices (apparent CMI increase). Apparent CMI increase 
results in a case

[[Page 27820]]

being grouped to a LTC-DRG with a higher weight than it will be without 
such changes in coding practices, which results in a higher LTCH PPS 
payment that does necessarily reflect the true cost of treating the 
patient. Therefore, in the RY 2007 LTCH PPS proposed rule (71 FR 4668), 
under the broad discretionary authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of the BIPA to 
include appropriate adjustments, including updates, in the 
establishment of the LTCH PPS, we proposed to revise the annual update 
to the LTCH PPS standard Federal rate set forth at Sec.  412.523(a)(2) 
for the 2007 LTCH PPS rate year to adjust the payment amount for LTCH 
inpatient hospital services to eliminate the effect of coding or 
classification changes that do not reflect real changes in LTCHs' case-
mix. We explained that it is important to eliminate the effect of 
coding or classification changes because they do not reflect the true 
cost of treating patients.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4668), 
we asked 3M Health Information Systems (3M) to examine changes in case-
mix and coding since the implementation of the LTCH PPS based on the 
most recently available data. As part of their analysis, 3M compared FY 
2003 LTCH claims data from the first year of implementation of the PPS 
with the FY 2001 claims data (generated prior to the implementation of 
the LTCH PPS), which is the same LTCH claims data used to develop the 
LTCH PPS. The analysis performed by 3M indicated, among other things, 
that the average annual CMI increase from FY 2001 to FY 2003 was 2.75 
percent. Since coding of diagnoses was not a factor in determining 
payments under the former reasonable cost-based (TEFRA) payment system, 
and since payments were not directly tied to diagnosis codes, there was 
no incentive for LTCHs to attempt to influence payments through changes 
in coding practices. Therefore, it is reasonable to assume that the 
observed 2.75 percent change in case-mix in the years prior to the 
implementation of the LTCH PPS represent the value for the real CMI 
increase (that is, we assume that the increase in case-mix is due to 
treatment of more resource intensive patients rather than to 
improvements in documentation or more complete coding of the medical 
record during this period). Using the average annual 2.75 percent 
observed CMI increase as a baseline, we separated the CMI increase 
between FY 2003 and FY 2004 into the real CMI increase, which is based 
on the treatment of more resource intensive patients, and the apparent 
CMI increase, which is due to improvements in documentation and coding 
practices.
    As we also stated in the RY 2007 LTCH PPS proposed rule (71 FR 
4668), the calculated observed CMI increase between FY 2003 and FY 2004 
was 6.75 percent. Assuming that the real CMI increase observed (on 
average) from FY 2001 to FY 2003 remained relatively constant into FY 
2005, then the difference of 4.0 percent (6.75 percent minus 2.75 
percent) represents the apparent CMI increase due to improvements in 
documentation and coding. This is considerably higher than the 0.34 
percent behavioral offset originally estimated by CMS actuaries, which 
was used in the development of the FY 2003 LTCH PPS standard Federal 
rate (67 FR 56033). Therefore, we stated our belief that a significant 
portion of the 6.75 percent increase in CMI between FY 2003 and FY 2004 
is due to changes in coding practices rather than the treatment of more 
resource intensive patients.
    In addition, in the RY 2007 LTCH PPS proposed rule (71 FR 4669), we 
discussed an internal CMS analysis, which shows high Medicare margins 
among LTCHs since the implementation of the LTCH PPS in FY 2003. We 
calculated ``revenue-weighted'' Medicare margins, which are the sum of 
LTCH inpatient Medicare revenue (payments) minus the sum of LTCH 
inpatient Medicare expenses (costs) divided by the sum of LTCH 
inpatient Medicare revenue (payments). This margin calculation, also 
utilized by MedPAC in its analyses, is used to evaluate the overall 
financial status of LTCHs. Specifically, our analysis found that LTCH 
Medicare margins for FY 2003 (the first year of the LTCH PPS) were 7.8 
percent and preliminary cost report data for FY 2004 reveal an even 
higher Medicare margin of 12.7 percent.
    We also noted that MedPAC is presently engaged in an evaluation of 
payment adequacy for LTCHs, which upon completion, will be published in 
the Commission's 2006 Reports to the Congress. In the RY 2007 LTCH PPS 
proposed rule (71 FR 4668), we discussed the Commission's preliminary 
findings that were presented at the October 7, 2005 public meeting. In 
MedPAC's March 2006 Report to Congress on Medicare Payment Policy, the 
Commission recommended that the update to the LTCH PPS Federal rate be 
eliminated for RY 2007 (Section 4C; page 219). We also discussed the 
review by a Medicare program safeguard contractor and other 
investigations of LTCHs treating patients that do not require hospital-
level care.
    Additionally, in the RY 2007 LTCH PPS proposed rule (71 FR 4670), 
we noted that the proposed zero percent update for the 2007 LTCH PPS 
rate year may make the one-time prospective adjustment to the LTCH PPS 
Federal rate, provided for under Sec.  412.523(d)(3), unnecessary if 
our comprehensive analysis of the LTCH PPS determines that LTCH PPS 
payments and the costs for LTCH services become aligned as a result of 
this change. We solicited comments on whether the proposed zero percent 
for the 2007 LTCH PPS rate year is appropriate or if an alternative 
percentage reduction should be applied to the standard Federal rate for 
the 2007 LTCH PPS rate year. Specifically, as explained in greater 
detail below, to the extent of our review of FY 2003 LTCH data (which 
will include but, is not limited to changes in case-mix) show that, if 
by coincidence after updating the Federal rate by zero percent for RY 
2007, the standard Federal rate is appropriate, it is possible that any 
further adjustment to the Federal rate may be unnecessary.
    Comment: A few commenters stated that CMS, in proposing a zero 
percent update to the Federal rate for RY 2007, failed to consider the 
recent revisions to the guidelines for utilizing DRG 475 (``Respiratory 
System Diagnosis with Ventilator Support'') that have resulted in 
reduced payments to LTCHs, despite that the same resources are being 
expended.
    Response: As discussed in section III. of the preamble of this 
final rule, the LTC-DRG assignments are based on GROUPER logic. The 
GROUPER is a software product that analyzes coding information 
submitted by hospitals, and subsequently makes a DRG assignment. CMS is 
responsible for GROUPER maintenance, including the assignment of DRGs. 
The DRG information is used to make payment to hospitals on behalf of 
Medicare beneficiaries treated by these hospitals. In contrast, the 
role of the AHA is to publish, in their document Coding Clinic for ICD-
9-CM, coding guidelines and advice as designated by the four 
cooperating parties. The cooperating parties that have final approval 
of the published coding advice are the AHA, the American Health 
Information Management Association (AHIMA), CMS, and the National 
Centers for Health Statistics.
    While the commenters have noted ``revisions to the guidelines for 
utilizing DRG 475'', it is not clear what guidelines are being cited. 
To address this comment in a responsible manner,

[[Page 27821]]

we would need more information than has been provided by the 
commenters. Furthermore, as discussed below in this preamble, the zero 
percent update finalized in this final rule is an adjustment that we 
have made to account for the case mix ``creep'' that was observed 
during FY 2004. Accordingly, any subsequent ``revisions to guidelines'' 
would have no impact on our need to make this adjustment in determining 
the RY 2007 Federal rate.
    Comment: As an alternative to the proposed zero percent update, one 
commenter encouraged CMS to work with the AHA in developing more 
stringent coding practices as currently considered by the ``Coding 
Clinic'' if it believes additional coding practices are needed.
    Response: In section III.E.3. of this final rule, we emphasize the 
need for proper coding by LTCHs. We also explain that inappropriate 
coding of cases can adversely affect the uniformity of cases in each 
LTC'DRG and produce inappropriate weighting factors at recalibration. 
We continue to urge LTCHs to focus on improved coding practices. 
Because of concerns raised by LTCHs concerning correct coding, we have 
asked the AHA to provide additional clarification or instruction on 
proper coding in the LTCH setting. As we noted earlier, the coding 
guidelines currently published by the AHA are the result of the joint 
collaboration of CMS, AHA, AHIMA, and the National Centers for Health 
Statistics.
    Comment: Many commenters expressed concern that the proposed 
changes to the SSO policy in conjunction with the proposed zero percent 
update would reduce hospital payments by nearly 15 percent, forcing 
LTCHs to operate at a loss when treating Medicare patients. They urged 
CMS to provide the full market basket update to the Federal rate for RY 
2007.
    Response: We disagree that the proposed zero percent update to the 
Federal rate would have resulted in ``reduced'' hospital payments. In 
the RY 2007 LTCH PPS proposed rule, we proposed to offset the market 
basket by an amount equal to the increase in case mix that was due 
solely to improved documentation and coding rather than changes in real 
case mix. At the time of the proposed rule, that increase was within 
rounding error of the market basket, and therefore resulted in a 
proposed Federal rate for RY 2007 that was equal to the RY 2006 Federal 
rate, and not a reduction to the RY 2006 Federal rate. We have provided 
throughout this section of this final rule, as we did in the proposed 
rule, our rationale for including an adjustment to account for changes 
in coding practices in the determination of the RY 2007 Federal rate. 
As discussed in the RY 2007 LTCH PPS proposed rule, and as discussed in 
greater detail below, we analyzed changes in the LTCHs' CMI in 
conjunction with a detailed analysis of LTCH margins since the 
implementation of the LTCH PPS, and our zero percent update policy is 
also based on these analyses.
    In response to the commenters concern that the proposed changes to 
the SSO policy could also force LTCHs to operate at a loss, in section 
VI.A.1. of the preamble of this final rule below, we discuss the 
changes to the SSO policy that we are establishing in this final rule, 
and in section XV. of this final rule we discuss the projected impact 
of those changes (as well as the other changes established in this 
final rule) on estimated aggregate LTCH PPS payments for RY 2007. 
Specifically, in our discussion of the estimated decrease in aggregate 
LTCH PPS payments for RY 2007, we explain that we do not believe that 
this change will result in an adverse impact on LTCHs because, as a 
result of the change to the SSO payment formula, we believe that LTCHs 
will significantly reduce the number of short-stay cases that they 
admit. We believe that by paying appropriately for these SSO cases by 
removing the financial incentive for LTCHs to admit those very short 
stay cases that could otherwise receive appropriate treatment at an 
acute-care hospital (and paid under the IPPS), LTCHs will change their 
admission patterns for these patients. The estimated decrease in LTCH 
PPS payments for RY 2007 was determined based on the current LTCH 
admission pattern of SSO cases (that is, currently about 37 percent of 
all LTCH cases), and we believe that the estimated decrease in LTCH 
payments per discharge for RY 2007 discussed in section XV. of this 
final rule will only occur if LTCHs were to continue to admit the same 
number of SSO patients with very short lengths of stay. Furthermore, as 
also discussed in section XV. of this final rule, we do not believe 
that this change will force LTCHs to operate at a loss because, based 
on our recent margins analysis (discussed in greater detail below in 
this section). LTCH margins for FY 2003 are in excess of 7 percent, and 
preliminary FY 2004 data shows margins in excess of 12 percent. 
Therefore, we believe that even with an estimated decrease in LTCHs' 
payments per discharge for the 2007 LTCH PPS rate year, LTCH PPS 
payments will be sufficient to compensate LTCHs for the costs of the 
efficient delivery of LTCH services to LTCH patients.
    Comment: Several commenters believed that CMS should allow a full 
market basket update to the LTCH PPS Federal rate for RY 2007. Other 
commenters stated that the LTCH PPS Federal rate should be updated 
annually by the most recent estimate of the market basket.
    Response: As we have discussed throughout this section of the 
preamble of this final rule, while we continue to believe that an 
update to the 2007 LTCH PPS rate year should be based on the most 
recent estimate of the LTCH PPS market basket, we believe it 
appropriate that the market basket be offset by an adjustment to 
account for changes in coding practices. Such an adjustment will 
protect the integrity of the Medicare Trust Funds by ensuring that the 
LTCH PPS payment rates better reflect the true costs of treating LTCH 
patients. We wish to emphasize that the RY 2007 Federal rate update of 
zero percent established in this final rule (as discussed in greater 
detail below) is based on the estimate of the LTCH PPS market basket 
for RY 2007. As we discussed in the RY 2007 LTCH PPS proposed rule and 
as we have discussed in greater detail above in this section, we 
believe that in determining the Federal rate update for RY 2007 it is 
appropriate to apply an adjustment to the most recent estimate of the 
LTCH PPS market basket to eliminate the effect of coding or 
classification changes that do not reflect real changes in LTCHs' case-
mix. This adjustment is necessary in order to serve to account for 
payments that were made based on improved coding (rather than increased 
patient severity) in prior years.
    As we noted in the RY 2007 LTCH PPS proposed rule (71 FR 4670) and 
as we reiterate below, the revision to Sec.  412.525(c)(3) established 
in this final rule will address an update to the LTCH PPS Federal rate 
for the 2007 LTCH PPS rate year. We will propose future revisions to 
Sec.  412.525(c)(3) to address future proposed updates to the LTCH PPS 
Federal rates in future rate years based on an analysis of the most 
recent LTCH data available that would be presented in upcoming LTCH 
proposed rules. Furthermore, as discussed above in section IV.C.2. of 
this preamble, we are also examining the potential for developing and 
implementing an update framework under the LTCH PPS. We believe an 
update framework, which would incorporate the market basket as one 
component, will enhance the methodology for updating payments by 
addressing factors such as case-mix, intensity, and productivity, 
beyond

[[Page 27822]]

changes in pure input prices (measured by the market basket). (As noted 
in section V.C.2 of this final rule, a preliminary model of an update 
framework that may be proposed at some later date for future use under 
the LTCH PPS is presented in Appendix A of this final rule.) However, 
at this time, we are not proposing a specific annual update framework. 
As noted above, we will wait until we have collected sufficient and 
complete LTCH PPS data to evaluate payments and costs under the LTCH 
PPS before proposing to establish such a framework for determining the 
annual update to the LTCH PPS Federal rate in the future.
    Comment: Many commenters stated that 3M's analysis of LTCH claims 
data was flawed. They stated that because a number of LTCHs did not 
transition to the LTCH PPS until FY 2004, using FY 2003 as a comparison 
to FY 2001 was wrong. The commenters also suggested that CMS would need 
to compare the CMI increases for LTCHs that elected reimbursement at 
the full Federal rate at the beginning or some time during the 
transition period to CMI increases for LTCHs that chose to go through 
the full 5-year transition. They emphasized that since LTCHs were 
transitioning to the LTCH PPS, it is unlikely that LTCHs were 
aggressively coding the stays of their Medicare patients.
    Response: We appreciate the commenters' concern that errors were 
made in analyzing LTCHs' CMI data; however, we disagree with the 
commenters that 3M's analysis of LTCH claims data was flawed. We 
believe commenters erroneously presumed that coding improvement begins 
on the date the LTCH elected to be reimbursed at the full Federal rate 
under the LTCH PPS and not before. Because providers paid under the 
transition blend have at least a portion of their payments based on the 
Federal rate, which is based on ICD-9-CM diagnosis and the accurate 
coding of procedure codes, we believe LTCHs still had an incentive to 
improve coding while they were transitioning to the full Federal rate. 
In addition, the commenters provide no evidence that the large increase 
from the 2.75 percent average annual increase in CMI in the years prior 
to the implementation of the LTCH PPS to the 6.75 percent increase in 
LTCH CMI found between FY 2003 and FY 2004 resulted from a sudden 
increase in patient acuity in one year, especially when analyzed in the 
context of the relatively small increase in costs observed during this 
same period.
    Comment: A few commenters asserted that the average intensity of 
Medicare inpatients has increased significantly from pre-PPS levels. 
Therefore, they believe the assumption that ``real'' case-mix is 2.75 
percent is faulty.
    Response: As explained in the RY 2007 LTCH PPS proposed rule (71 FR 
4668), we made the assumption that real case-mix was 2.75 percent based 
on the average annual CMI increase in the three years prior to the full 
implementation of the LTCH PPS (that is, between FY 2001 and FY 2003). 
As we acknowledged in that same proposed rule, while it may be true 
that the average intensity has increased from pre-PPS levels, it is not 
supported by our analysis of the change in LTCHs' costs. As we stated 
in the RY 2007 LTCH PPS proposed rule, we did not observe a large 
increase in cost per discharge between FY 2003 and FY 2004, which we 
would have expected if the observed CMI increase was due to real CMI 
change (treating sicker patients). We would have expected to see a 
large increase in costs per discharge to pay for the resources needed 
to treat sicker patients if the CMI increase was due to ``real'' CMI 
change.
    We do not believe the assumption that the increase in ``real'' 
case-mix is 2.75 percent is faulty. A LTCH's CMI is defined as its case 
weighted average LTC-DRG relative weight for all its discharges in a 
given period. Changes in CMI consist of two components: ``Real'' CMI 
changes and ``apparent'' CMI changes. As stated in the RY 2007 LTCH PPS 
proposed rule, the 4.0 percent apparent CMI increase is a conservative 
estimate when compared to the 5.35 percent apparent CMI increase that 
would result if we had applied the information from past studies on 
case-mix change to the analysis of the LTCHs CMI increase. Based on 
past studies of IPPS case-mix change by the RAND Corporation, (``Has 
DRG Creep Crept Up? Decomposing the Case-Mix Index Change Between 1987 
and 1988'' by G. M. Carter, J.P. Newhouse, and D. A. Relles, R-4098-
HCFA/ProPAC (1991)), in updating IPPS rates we have consistently 
assumed that real case-mix change for IPPS hospitals was a fairly 
steady 1.0 to 1.4 percent per year. If we had applied this same 
assumption to LTCHs, we would have concluded that nearly 5.35 percent 
(6.75 percent minus 1.4 percent) of the change in case-mix during the 
first year of the LTCH PPS is apparent CMI and not real CMI. 
Consequently, if we had applied this more conservative estimate of real 
case-mix increase, the proposed update to the Federal rate for RY 2007 
would have been a reduction to the current Federal rate rather than 
leaving the Federal rate unchanged.
    Comment: Several commenters stated that CMS was unfairly penalizing 
LTCHs twice for ``case mix creep'' (that is, the ``apparent'' CMI 
increase between FYs 2003 and 2004). They stated that CMS had already 
corrected any coding issues from FY 2004 by reweighting the LTC-DRGs 
for FY 2006 based on that data, which resulted in an estimated 4.2 
percent reduction in payments to LTCHs.
    Response: Under the LTCH PPS, we determine LTC-DRG relative weights 
as discussed in section III. of this preamble, to account for the 
difference in resource use by patients exhibiting the case complexity 
and multiple medical problems characteristic of LTCH patients. As we 
discussed in the FY 2006 IPPS final rule (70 FR 47701 through 47702), 
we recalibrated FY 2006 LTC-DRG relative weights based on an analysis 
of LTCH claims data from the FY 2004 MedPAR file. Thus, FY 2004 LTCH 
claims data, which reflected improved coding, were used to determine 
the LTC-DRG relative weights used to pay LTCH PPS discharges occurring 
during FY 2006.
    While it is true that the reweighting of the LTC-DRGs using FY 2004 
LTCH claims served to update the relative weights based on actual 
claims data in each LTC-DRG, which also reflects coding improvements 
that occurred in FY 2004, the recalibration of LTC-DRG weights only 
corrects for any coding improvement for the purpose of making accurate 
LTCH PPS payments in FY 2006. However, annual recalibration does not 
serve to account for payments that were made based on improved coding 
(rather than patient severity) in prior years. The case mix adjustment 
to the market basket in determining the RY 2007 Federal rate is meant 
to reduce current payments to account for the increase payments that 
occurred in FY 2004 that resulted from the CMI increase that is 
attributable to ``case-mix'' creep in that year. Therefore, we disagree 
that providers are being penalized twice for the LTCH coding 
improvements that occurred in FY 2004 (that is, ``case-mix creep'').
    Comment: Several commenters contend that our margins analysis is 
flawed. The commenters state that although we reported that preliminary 
data showed LTCH margins of 12.7 percent for FY 2004, an examination of 
MedPAC LTCH margin data shows that almost a quarter of LTCHs (23 
percent) had negative Medicare margins in 2004. One of the commenters 
also stated that MedPAC did not take into consideration the effect of 
the ``25 percent rule'' on reimbursement to LTCH hospitals-within-
hospitals (HWHs) for admissions from the host hospital when modeling 
LTCH Medicare margins. The

[[Page 27823]]

commenter also believes that in stating that the reported increases in 
costs were not found to be commensurate with the reported increases in 
CMI (and Medicare payments), CMS did not allow for any increase in 
efficiency by LTCHs. However, in the update framework section (Appendix 
A of the RY 2007 LTCH PPS proposed rule), the commenter points out that 
CMS suggests that it may begin measuring efficiency, and may also 
account for such a factor in a possible proposed future update 
framework methodology. The commenter believes CMS is inconsistent with 
regards to efficiency.
    Response: As we explained in the RY 2007 LTCH PPS proposed rule, 
the margins analysis was revenue-weighted (that is, calculated by 
adding the total Medicare payments and expenses for all LTCHs). CMS and 
MedPAC use this type of margin calculation to assess whether Medicare 
payment rates to LTCHs (as a provider class) are adequate. The 
commenter states that nearly one-quarter of LTCHs had negative margins 
in FY 2004, we note that based on the preliminary data for FY 2004, 
one-quarter of LTCHs had margins greater than 18 percent. Therefore, it 
is reasonable and expected that we estimate aggregate positive LTCH 
margins in excess of 12 percent for FY 2004, as stated below in this 
section.
    Based on data from the LTCHs' cost reports received as of December 
31, 2005, updated LTCH margins analysis for this final rule continues 
to show high Medicare margins among LTCHs since the implementation of 
the LTCH PPS in FY 2003. As we did for the RY 2007 LTCH PPS proposed 
rule, we calculated ``revenue-weighted'' Medicare margins, which are 
the sum of hospital inpatient Medicare revenue (payments) minus the sum 
of hospital inpatient Medicare expenses (costs) divided by the sum of 
hospital inpatient Medicare revenue (payments). This margin 
calculation, also utilized by MedPAC in its analyses, is used to 
evaluate the overall financial status of LTCHs in general. In an 
analysis of the latest available LTCH cost reports, we found that LTCH 
Medicare margins for FY 2003 (the first year of the LTCH PPS) were 7.8 
percent and preliminary cost report data for FY 2004 based on the most 
recent update to the cost report data in HCRIS reveal an even higher 
Medicare margin of 12.7 percent. For periods prior to the 
implementation of the LTCH PPS (that is, FY 1999 through FY 2002), we 
found that aggregate Medicare margins ranged between a minimum of -2.3 
percent in FY 2000, and a maximum of 1.5 percent in FY 2002. MedPAC 
also noted that LTCH HwHs were found to have higher margins than 
freestanding LTCHs in RY 2004.
    As mentioned by the commenter, when discussing MedPAC's modeling of 
the 2006 LTCH PPS margins, MedPAC's 2006 LTCH PPS margins analysis did 
not include the effect of the HwH ``25 percent rule,'' which is the 
special payment provisions for LTCH HwHs and satellites that we 
established at Sec.  412.534 in the FY 2005 IPPS final rule. Under this 
policy we provide a payment adjustment for those patients discharged 
from co-located LTCHs (that is, HwHs and satellites) admitted from host 
hospitals that exceeded a specified percentage (in most cases, 25 
percent). Medicare patients who reach HCO status in the host hospital 
are excluded from the count of the percentage of patients admitted 
directly from the host. We additionally provided a 4-year transition to 
this policy for existing LTCH HwHs and satellites and those LTCH HwHs 
paid under the LTCH PPS on October 1, 2005 and whose qualifying period 
began on or before October 1, 2004; however, all other LTCHs are 
immediately governed by the percentage thresholds established under 
Sec.  412.534.
    In the transcript of MedPAC's December 8, 2005 public meeting (p. 
164), the MedPAC analyst noted that despite the desire to model the 
effect of the HwH ``25 percent rule'' established at Sec.  412.534 when 
modeling 2006 LTCH margins, they were unable to do so at that time 
since the first year of the 5-year phase-in (FY 2005) was ``hold-
harmless'' and any fiscal impact (that is, percentage threshold 
requirements specified at Sec.  412.534) are effective for cost 
reporting periods beginning during the current fiscal year (FY 2006). 
As we discussed in the FY 2005 IPPS final rule when we implemented the 
``25 percent rule'' at Sec.  412.534 (69 FR 49771), we were unable to 
estimate the impact of this policy because we anticipated behavioral 
changes by both the host and the co-located LTCHs resulting from the 
provision that exempts HCOs from the percentage threshold calculation. 
We are unable to estimate the impact on new LTCHs that will be 
immediately subject to the full threshold requirements established 
following the implementation of those regulations.
    As MedPAC noted at their public meeting, FY 2006 is the first year 
of the 4-year phase-in of the threshold requirements established under 
Sec.  412.534, and due to the lag time in the availability of data, we 
currently do not have sufficient FY 2006 data to determine the effect 
of the implementation of those requirements on LTCHs' behavior. 
Therefore, we are still unable to estimate the impact of this policy. 
However, since the policy at Sec.  412.534 exempts IPPS HCOs at the 
acute-care host hospital from the LTCHs' percentage threshold 
calculation (as noted above), and since, as noted earlier, the margins 
for HwHs are higher than those of freestanding LTCHs, we believe that 
even with some adjustments resulting in a decrease in some co-located 
LTCHs' RY 2007 LTCH PPS payments due to the threshold requirements 
under Sec.  412.534, Medicare payments to co-located LTCHs will exceed 
the Medicare costs of the inpatient hospital services provided to its 
patients even with a zero percent update to the Federal rate for RY 
2007.
    As discussed in the RY 2007 LTCH PPS proposed rule, the large 
observed increase in LTCH case-mix was not accompanied by a 
corresponding increase in Medicare costs. This is consistent with our 
belief expressed earlier that a significant part of this observed 
increase in case-mix is ``apparent'' and not ``real.'' In conjunction 
with an increase in real case-mix we would have expected to see a 
significant increase in costs per discharge, even taking into account 
LTCH operating efficiencies, to pay for the resources needed to treat 
sicker patients. Consistent with MedPAC's most recent research 
discussed in its March 2006 Report to Congress (section 4C), our 
margins analysis indicates that, in spite of the estimated real 
increase in case-mix (severity of patients), payments to LTCHs under 
the LTCH PPS are generally more than adequate to cover the Medicare 
costs of the inpatient hospital services provided to LTCH patients.
    As we also discussed in the RY 2007 LTCH PPS proposed rule, 
although supported by our LTCHs' margins analysis, the zero percent 
update to the Federal rate for RY 2007 is primarily based on our 
analysis of case-mix. This analysis indicates that a significant 
portion of the observed increase in case-mix from FY 2003 to FY 2004 is 
due to changes in coding practices rather than an increase in the 
severity of LTCHs' patients. Specifically, based on the latest 
available LTCH cost report data, our analysis supports our adjustment 
to account for changes in coding practices. Specifically, the most 
recent available LTCH cost report data shows that, while payments 
(revenue) per discharge increased in excess of the market basket 
estimate for the period, costs (expenses) per discharge either 
increased at a significantly lower rate or decreased

[[Page 27824]]

slightly for the same period (as discussed in greater detail below).
    As noted by the commenter, the conceptual discussion of a 
preliminary model of an update framework under the LTCH PPS presented 
in the RY 2007 LTCH PPS proposed rule (71 FR 4742 through 4747), 
accounts for efficiency as a component of the adjustments for 
productivity and intensity. However, we have not assumed that the 
reason costs have not increased commensurate with case-mix (and 
payments) is due to increased efficiency by LTCHs. As stated 
previously, the update framework was presented at this point as under 
development and was not used to determine the proposed update to the 
standard Federal rate for RY 2007. Furthermore, even the conceptual 
model of the illustrative LTCH PPS update framework for RY 2007 
presented in Appendix A for discussion purposes we had recommended a -
0.9 percent adjustment for productivity (an efficiency measure) based 
on the productivity target used by MedPAC. This factor is based on BLS' 
estimate of the 10-year moving national average rate of productivity 
growth (71 FR 4746). This productivity adjustment in the illustrative 
update framework assumes that an efficient LTCH can produce more output 
(that is, inpatient hospital services) with the same inputs (that is, 
labor and capital) such that the full increase in input costs does not 
have to be passed on by the provider (71 FR 4744). Therefore, the 
recommended efficiency measure of -0.9 percent adjustment included in 
the illustrative update framework reduces the adjustment for input 
prices (that is, market basket estimate) based on the expectation that 
an efficient LTCH can produce the same output with slightly less than 1 
percent less of the same inputs. In absence of accounting for a factor 
that accounts for efficiency, we would expect that costs per discharge 
would increase at about the same rate as the estimate of market basket, 
which has previously been used to update the LTCH PPS Federal rate 
annually, plus any increase that is based on an increase in patient 
severity (that is, real case-mix). However, our analysis of LTCHs 
payments and costs per discharge based on the latest available cost 
report data supports our adjustment to account for changes in coding 
practices because it shows that while payments (revenue) per discharge 
increased approximately 15 percent from FY 2002 to FY 2003 (the first 
year of the LTCH PPS), costs (expenses) per discharge increased by only 
about 8 percent for the same period. Thus payments to LTCHs from FY 
2002 to FY 2003 increased almost twice as much as the increase of costs 
during the same period. Furthermore, based on the most recent available 
LTCH cost report data for FY 2004, we found that while payments 
(revenue) per discharge increased by approximately 5 percent from FY 
2003 to FY 2004, costs (expenses) per discharge actually decreased 
slightly (about 0.7 percent) for the same period.
    As discussed in the RY 2007 LTCH PPS proposed rule, the 
illustrative update framework shown in Appendix A is only a preliminary 
model, and we solicited comments regarding improvements or refinements 
to it that we will consider if we propose to adopt an update framework 
in the future under the LTCH PPS. By nature, a PPS is a system based on 
averages, and therefore we expect that LTCHs, like any provider type 
that is under a PPS system, already have and will continue to become 
more efficient with the implementation of the LTCH PPS. While 
increasing efficiency in the services delivered in the treatment of 
Medicare beneficiaries could result in some reduction in LTCHs' 
Medicare costs by providing the same output (that is, inpatient 
hospital services) with a minimum of waste, expense and effort, it is 
unlikely that the significant difference between the increase in case-
mix (and payments per discharge) and change in costs per case 
(discussed above in this section) is solely the result of increased 
efficiency of LTCHs. As noted above, our illustrative update framework 
only included a -0.9 percent adjustment for productivity, while our 
margins analysis shows a substantially larger difference between the 
change between payments per discharge and costs per discharge since the 
implementation of the LTCH PPS, which we believe are due to factors 
(that is, changes in coding practices) other than increased 
efficiencies by LTCHs. As we stated in the proposed rule and as noted 
above, we did not observe a significant increase in cost per discharge. 
In fact, for FY 2004, the latest cost report data shows a decrease in 
costs per discharge, which we would have expected to see if the 
observed CMI increase was due to ``real'' CMI change (treating sicker 
patients). In addition, as stated in the RY 2007 LTCH PPS proposed rule 
and as discussed in greater detail in this section of this final rule, 
a review by a Medicare program safeguard contractor and other anecdotal 
findings of LTCHs treating patients that do not require hospital-level 
care further supports the data analysis which show that the increase in 
LTCHs' CMI is primarily due to factors other than real CMI.
    Therefore, we disagree with the commenter that we failed to account 
for efficiency in determining the update to the Federal rate for RY 
2007. We believe that while there may be some reduction in LTCH costs 
per discharge as a result of efficiency, the difference between LTCHs' 
cost per discharge and payments per discharge is so profound that it 
cannot be reasonably assumed that efficiency is the sole basis for that 
difference. Rather, we believe it is the changes in coding practices, 
discussed previously, that have led to the substantial difference 
between LTCHs' cost per discharge and payments per discharge, which has 
had a significant impact on LTCHs' margins.
    Comment: One commenter noted that while the proposed zero percent 
update appears in MedPAC's recommendations, the Congress has not agreed 
to take action on MedPAC's recommendation to eliminate an update to the 
RY 2007 payment rate.
    Response: The proposal to provide a zero percent update to the LTCH 
PPS Federal rate for RY 2007 was consistent with MedPAC's 
recommendation. Although it is correct that the Congress has not taken 
specific action to legislate MedPAC's recommendation as stated in the 
RY 2007 LTCH PPS proposed rule, the Secretary has been given the broad 
discretionary authority, under section 123 of the BBRA as amended by 
section 307(b) of the BIPA, to include appropriate adjustments, 
including updates, in the establishment of the LTCH PPS. We continue to 
believe that our proposal to establish a zero percent update to the 
Federal rate to account for ``apparent'' case-mix is appropriate for 
the reasons discussed in the RY 2007 LTCH PPS proposed rule that were 
also stated above and is within the broad discretionary authority 
conferred upon the Secretary in section 123 of the BBRA as amended by 
section 307(b) of the BIPA. In addition, as discussed above, our 
margins analysis indicates that current payments are more than adequate 
to account for price increases in the services furnished by LTCHs 
during the 2007 LTCH PPS rate year.
    Comment: One commenter urged CMS to enact the proposed zero percent 
update for RY 2007 only if no modifications are made to the SSO payment 
formulas. The commenter stated that this would be consistent with 
MedPAC's recommendations based on no change in LTCH payment policies.
    Response: As the fiduciary of the Medicare Trust Fund, we are 
responsible for reexamining our payment systems and revising those

[[Page 27825]]

payment systems, if necessary, to ensure that appropriate payments are 
made for the efficient delivery of care to Medicare patients. This 
requires that we periodically reexamine the policy components of our 
payment systems and propose changes accordingly. As we discussed in 
greater detail in the RY 2007 LTCH PPS proposed rule (71 FR 4667 
through 4670), we believe our findings regarding LTCHs' CMI increase, 
Medicare margins, and patient census supported our proposal of a zero 
percent update for RY 2007. As discussed in that same proposed rule, we 
believe that an adjustment to the most recent estimate of the LTCH PPS 
market basket to account for the effects of changes in coding practices 
is important to eliminate the effect of coding or classification 
changes because, as discussed in greater detail in this section, they 
do not reflect the true cost of treating patients.
    Also in the RY 2007 LTCH PPS proposed rule, we proposed changes to 
the SSO policy based on our review of that policy along with many other 
LTCH PPS policies and LTCH behavior. As we discussed in that same 
proposed rule (71 FR 4685 through 4690), the proposed revision to the 
SSO policy would, among other things, reduce the unintended financial 
incentive for LTCHs to admit short-stay patients that may exist under 
the current SSO policy, and therefore, based on the most recent 
complete data available, we believe revisions to the current SSO 
policies are necessary and in no way should they be tied to the change 
made regarding the update for RY 2007. (In section VI.A.1. of the 
preamble below, we discuss the changes to the SSO policy that we are 
establishing in this final rule.)
    Therefore, because the intended purposes of the proposed adjustment 
to the SSO policy and the proposed Federal rate update for RY 2007 are 
different, as explained above, we believe changes to these policies 
should be evaluated independently. Although, as discussed in greater 
detail below in section V.A.1. of this preamble, we are modifying the 
proposed SSO policy for the RY 2007 LTCH PPS final rule. As we 
discussed in this section, we continue to believe that an adjustment to 
the most recent estimate of the LTCH PPS market basket to account for 
the effects of changes in coding practices in determining the update to 
the Federal rate for RY 2007 is also necessary and appropriate.
    Comment: Many commenters noted that the Medicare Program Safeguard 
Contractor Review of one LTCH is not representative data upon which to 
base the proposed zero percent adjustment.
    Response: As stated in the RY 2007 LTCH PPS proposed rule, the 
information obtained from the Medicare Program Safeguard Contractor 
Review and the other anecdotal investigations of LTCHs treating 
patients that do not require hospital-level care was only one factor of 
our analysis. As discussed in that same proposed rule and as reiterated 
above, the primary factors upon which our proposal to determine an 
update to the Federal rate for RY 2007 was our CMI analysis and our 
Medicare margins analysis. We agree with the commenters that we are not 
aware of any determination made to indicate that LTCHs consistently 
admit non-hospital level patients.
    Comment: One commenter stated that while it may be true that some 
LTCHs posted significant positive margins and saw significant increases 
in their case-mix, not all LTCHs had that experience. The commenter 
questioned how hospitals with negative margins would survive with a 
zero percent update in RY 2007. Another commenter stated that ``older'' 
LTCHs should be ``grandfathered'' from implementation of the proposed 
zero percent update for RY 2007. The commenter states that 
grandfathering ``older'' LTCHs would ensure that these hospitals are 
not affected by the perceived abuses of other newer hospitals.
    Response: Prior to the implementation of the LTCH PPS, LTCHs were 
reimbursed under reasonable cost principles (TEFRA), which established 
payments to LTCHs based on hospital-specific limits for inpatient 
operating costs. However, in response to the industry's advocacy for a 
PPS for LTCHs, in section 123 of the BBRA as amended by section 307(b) 
of the BIPA, the Congress directed the Secretary of HHS to develop a 
per-discharge PPS for payment for LTCHs. The LTCH PPS was implemented 
in FY 2003.
    By definition, payments under a PPS are predicated on averages. 
Therefore, while it may be true that some ``older'' LTCHs may not have 
experienced as large of an increase in case mix between FY 2003 and FY 
2004, the same could be true of some LTCHs in other categories. In 
addition, our findings reveal that while some LTCHs endured negative 
margins, one-quarter of all LTCHs posted margins greater than 18 
percent. Because, in general, PPS policies are based on averages, we do 
not believe it would be appropriate to exclude or ``grandfather'' 
hospital groups based on their Medicare participation date from 
implementation of the Federal rate update for RY 2007. Therefore, the 
RY 2007 Federal rate established in this final rule, as discussed 
below, will be applicable to an LTCH regardless of the age of the 
facility.
    Comment: A few commenters questioned how CMS could justify 
proposing a zero update to the Federal rate for RY 2007, while at the 
same time proposing to postpone the implementation of the one-time 
adjustment to account for differences between actual and estimated 
payments for the first year of the LTCH PPS due to coding and other 
factors until July 1, 2008. One commenter asserted that this approach 
is contrary to PPS design and undermines the integrity and 
predictability of the payment system. The commenter also stated that 
CMS should pursue a one-time adjustment independent of a market basket 
update for RY 2007. Another commenter stated that CMS should use the 
zero update as the one-time adjustment and not extend the deadline.
    Response: The commenters are referring to the one-time prospective 
adjustment at Sec.  412.523(d)(3), which states that the Secretary may 
make a one-time prospective adjustment to the LTCH PPS rates by October 
1, 2006, so that the effect of any significant difference between 
actual payments and estimated payments for the first year of the LTCH 
PPS would not be perpetuated in the LTCH PPS rates for future years. As 
discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4681 through 
4684), the purpose of this one-time adjustment is to ensure that 
ultimately, total payments under the LTCH PPS are ``budget neutral'' to 
what total payments would have been if the LTCH PPS were not 
implemented in FY 2003, by correcting for possible significant errors 
in the calculation of the FY 2003 LTCH PPS standard Federal rate. The 
one-time adjustment would ensure that any errors in past estimates 
would not be perpetuated in the LTCH PPS rates for future years, while 
the proposed adjustment to account for coding practices in the proposed 
update to the Federal rate for RY 2007 is intended to adjust payments 
made in FY 2004 to account for the increase in CMI due to improved 
documentation and coding rather than an increase in patient severity. 
Therefore, because the intended purposes of the adjustments are 
different, as explained above, we disagree with the commenter that the 
zero percent update to the Federal rate for RY 2007 is ``contrary to 
the PPS design and undermines the integrity and predictability of the 
payment system.'' Furthermore, we do not believe that the proposed zero 
percent update to the Federal rate for RY 2007 should replace the 
possible one-time budget neutrality

[[Page 27826]]

adjustment or vice versa since the intended purposes of the adjustments 
are different (as explained above in this section). However, as we 
noted in the RY 2007 LTCH PPS proposed rule and as we reiterated above, 
it is possible that the proposed zero percent update for the 2007 LTCH 
PPS rate year may make the one-time prospective adjustment to the LTCH 
PPS Federal rate, provided for under Sec.  412.523(d)(3), unnecessary 
if our comprehensive analysis of the LTCH PPS determines that LTCH PPS 
payments and the costs for LTCH services have become aligned as a 
result of this change. Specifically, the purpose of the one-time budget 
neutrality adjustment under Sec.  412.523(d)(3) is intended to account 
for possible significant errors in the various factors and assumptions 
(not just case-mix increase) used in calculating the FY 2003 standard 
Federal rate. To the extent our review of FY 2003 LTCH data show, if by 
coincidence after updating the Federal rate by zero percent for RY 
2007, that the standard Federal rate is appropriate, any further 
adjustment to the Federal rate may be unnecessary. Similarly, if our 
comprehensive analysis of the LTCH PPS determines that the current 
Federal rate, which is based on the FY 2003 standard Federal rate, is 
inappropriate (that is, either too high or too low), then an adjustment 
under Sec.  412.523(d)(3) would be necessary.
    As discussed in greater detail in the RY 2007 LTCH PPS proposed 
rule (71 FR 4680 through 4682), we proposed to extend the deadline for 
making the possible one-time adjustment until July 1, 2008 because we 
do not now believe that we will have sufficient data to make the 
determination by the current deadline of October 1, 2006. Specifically, 
as discussed in greater detail below in section V.D.6. of this 
preamble, we believe that only through a thorough analysis of the most 
comprehensive and accurate data from the first year of the 
implementation of the LTCH PPS for FY 2003 (including settled and fully 
audited cost reports) would we be able to reliably determine whether 
the one-time prospective adjustment to the standard Federal rate, which 
if issued would have an impact on all future payments under the LTCH 
PPS, should be proposed. Given the lag time required for typical cost 
report settlement involving submission, desk review, and in some cases 
an audit, which can take approximately 2 additional years to complete 
(and we expect to audit a number of LTCH cost reports for the purpose 
of this analysis), we do not believe that the October 1, 2006 deadline 
established in Sec.  412.523(d)(3) is now reasonable or realistic. In 
fact, we believe that for providers whose FY 2003 cost reporting 
periods began at the end of FY 2003 (that is, September 2003) and ended 
in August 2004, we would be in possession of the most reliable cost 
report data indicating the actual costs of the Medicare program of the 
LTCH PPS during the year in which we established the Federal payment 
rate by July 2007 and any proposed correction, if finalized, could then 
be implemented on July 1, 2008.
    To summarize, despite the concerns expressed by the commenters, as 
discussed above, we continue to believe that our CMI analysis and 
Medicare margins analysis are sound. We continue to believe that an 
update to the 2007 LTCH PPS rate year based on the LTCH PPS market 
basket, offset by an adjustment to account for changes in coding 
practices, is appropriate to protect the integrity of the Medicare 
Trust Fund by ensuring that the LTCH PPS payment rates better reflect 
the true costs of treating LTCH patients.
    Therefore, in this final rule, under the broad discretionary 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA to include appropriate 
adjustments, including updates, in the establishment of the LTCH PPS, 
as proposed, we are revising the annual update to the LTCH PPS standard 
Federal rate set forth at Sec.  412.523(a)(2) for the 2007 LTCH PPS 
rate year to adjust the payment amount for LTCH inpatient hospital 
services to eliminate the effect of coding or classification changes 
that do not reflect real changes in LTCHs' case-mix. As discussed in 
the RY 2007 LTCH PPS proposed rule and as reiterated above, it is 
important to eliminate the effect of coding or classification changes 
because, they do not reflect the true cost of treating patients.
    Specifically, in this final rule, we are revising Sec.  
412.523(c)(3)(iii) to specify that the standard Federal rate for the 
LTCH PPS rate year beginning July 1, 2006 and ending June 30, 2007, 
will be the standard Federal rate from the previous year, as explained 
below. A zero percent update factor will reflect an adjustment to the 
market basket update to account for the increase in the apparent case-
mix in the prior period. As explained in the RY 2007 LTCH PPS proposed 
rule (71 FR 4669), based on our analysis of the observed LTCH case-mix 
increase, we estimate that 4 percent of the 6.75 percent calculated 
observed LTCH CMI increase is due to improvements in documentation and 
coding and not due to an increase in the severity of the patients being 
treated at LTCHs. As previously noted, the Federal payment rate was 
offset by 0.34 percent to reflect expected behavioral changes, 
including changes in coding. The recent estimate of apparent CMI 
increase (4 percent) indicates that an additional 3.66 percent 
adjustment (4 percent apparent CMI increase minus 0.34 percent 
behavioral offset) should be made to the Federal payment rate to 
account for improvements in coding.
    Therefore, in the RY 2007 LTCH PPS proposed rule (71 FR 4669), we 
proposed a zero percent update by offsetting the most recent estimate 
of the proposed RPL market basket for RY 2007 of 3.6 percent by an 
adjustment for changes in coding practices of 3.66 (that is, 4.0 - 0.34 
= 3.66), which is within rounding of zero percent. As discussed above 
in section V.B.4. of this final rule, the most recent estimate of the 
RPL market basket for RY 2007 is 3.4 percent, which is 0.2 percent 
lower than the estimate of the RPL market basket for RY 2007 at the 
time of the development of the proposed rule. Although we note the most 
recent update of the market basket discussed in this final rule is 0.2 
percent lower than the estimate of the market basket discussed in the 
RY 2007 LTCH PPS proposed rule, we continue to believe that a zero 
percent update to the Federal rate for RY 2007 is appropriate and will 
account for changes in coding practices that do not reflect increased 
severity of LTCH patients for the reasons discussed below. As discussed 
in greater detail above, changes in CMI consist of ``real'' CMI changes 
and ``apparent'' CMI changes. In determining the proposed zero percent 
update to the Federal rate for RY 2007, we measured LTCHs' observed 
case-mix increase between FY 2003 and FY 2004, and we used the average 
case-mix increase from the 3 years prior to the implementation of the 
LTCH PPS as a proxy for the portion of that observed case-mix increase 
that we consider to be ``real.'' We do not believe that there is a 
significant difference between the most recent estimate of the market 
basket for RY 2007 (3.4 percent) and the estimate used in the RY 2007 
LTCH PPS proposed rule (3.6 percent). Furthermore, there could be some 
minimal variation in how much of the observed case-mix increase 
represents real case-mix changes. In addition, because the proposed 
update for RY 2007 at proposed Sec.  412.523(c)(3)(iii) explicitly 
specified that the RY 2007 standard Federal rate would be the previous 
LTCH PPS rate year updated by an update factor of zero percent, we 
believe some commenters may not have

[[Page 27827]]

been aware that the final update for RY 2007 could have been different 
than (that is, greater than or less than) zero percent. Thus, we 
believe that the best approach in this final rule is to adopt an update 
factor of zero percent. For these reasons, we believe that a zero 
percent update to the Federal rate for RY 2007 will appropriately 
account for changes in coding practices that do not reflect increased 
severity of LTCH patients. We note that, as discussed above, a zero 
percent update is consistent with MedPAC's LTCH PPS update 
recommendation for RY 2007. Therefore, in this final rule, under the 
broad discretionary authority conferred upon the Secretary by section 
123(a) of the BBRA as amended by section 307(b) of the BIPA to include 
appropriate adjustments, including updates, in the establishment of the 
LTCH PPS, for the reasons discussed previously in this final rule, we 
are establishing a zero percent update to the standard Federal rate for 
RY 2007. Accordingly, we are specifying under Sec.  412.525(c)(3)(iii) 
that the standard Federal rate for the LTCH PPS rate year July 1, 2006 
through June 30, 2007, will be the standard Federal rate from the 
previous LTCH PPS rate year. Based on the zero percent update to the 
Federal rate for RY 2007 LTCH PPS rate year, the LTCH PPS standard 
Federal rate for the 2007 LTCH PPS rate year will be $38,086.04, as 
discussed in section V.C.4. of this final rule.
    As discussed in section V.B.4. of this preamble, the most recent 
estimate of the LTCH PPS market basket is 3.4 percent for the 2007 LTCH 
PPS rate year. If we were not revising Sec.  412.523(c)(3) to provide a 
zero percent update to the standard Federal rate for the 2007 LTCH PPS 
rate year to account for changes in coding that do not reflect real 
changes in the severity and cost of LTCH patients presented in this 
final rule, under existing Sec.  412.523(c)(3)(ii) the update would be 
3.4 percent. We also note that although we are establishing a zero 
percent update to the Federal rate for RY 2007 in this final rule, we 
continue to believe that, based on the sizeable Medicare margins among 
LTCHs, the standard Federal rate for the 2007 LTCH PPS rate year 
established in this final rule will not affect beneficiary access to 
LTCH services since LTCHs would continue to be paid adequately to 
reflect the cost of resources needed to treat Medicare beneficiaries.
    As we noted in the RY 2007 LTCH PPS proposed rule (71 FR 4670), the 
revision to Sec.  412.525(c)(3) established in this final rule will 
only address an update to the LTCH PPS Federal rate through the 2007 
LTCH PPS rate year. We will propose future revisions to Sec.  
412.525(c)(3) to address future proposed updates to the LTCH PPS 
Federal rates in future rate years based on an analysis of the most 
recent available LTCH data that would be presented in upcoming LTCH 
proposed rules. As noted previously in this final rule and in the 
August 30, 2002 final rule (67 FR 56097), we are examining the 
potential for developing and implementing an update framework under the 
LTCH PPS. We believe an update framework, used in combination with the 
market basket, will enhance the methodology for updating payments by 
addressing factors beyond changes in pure input prices (measured by the 
market basket) such as case-mix, intensity, and productivity. (As noted 
in section V.C.2 of this final rule, a preliminary model of an update 
framework that may be proposed at some later date for future use under 
the LTCH PPS is presented in Appendix A of this final rule.) However, 
we are not proposing a specific annual update framework until we have 
collected sufficient complete LTCH PPS data to evaluate payments and 
costs under the LTCH PPS.
    As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4670), 
currently as implemented in Sec.  412.523(d)(3), we are providing for 
the possibility of making a one-time prospective adjustment to the LTCH 
PPS rates so that any significant difference from actual payments and 
the estimated payments for the first year of the LTCH PPS is not 
perpetuated in the prospective payment rates for future years. As 
discussed in section V.D.5. of this final rule, we are not making an 
adjustment to the LTCH PPS rates under Sec.  412.523(d)(3) in this 
final rule; however, we will continue to collect and interpret new data 
to determine if an adjustment should be proposed in the future. In 
addition, as also discussed in section IV.D.5. of this final rule, we 
are postponing the deadline of the possible one-time prospective 
adjustment to the LTCH PPS rates provided for in Sec.  412.523(d)(3) to 
July 1, 2008 in order to maximize the availability of data used to 
conduct a comprehensive evaluation of the LTCH PPS. However, as 
explained above in this section, the zero percent update to the Federal 
rate for the 2007 LTCH PPS rate year may make this one-time prospective 
adjustment to the LTCH PPS Federal rate unnecessary if our 
comprehensive analysis of the LTCH PPS determines that LTCH PPS 
payments and the costs for LTCH services become aligned as a result of 
this change.
4. Standard Federal Rate for the 2007 LTCH PPS Rate Year
    In the RY 2006 LTCH PPS final rule (70 FR 24180), we established a 
standard Federal rate of $38,086.04 for the 2006 LTCH PPS rate year 
that was based on the best available data and policies established in 
that final rule. In the RY 2007 LTCH PPS proposed rule (71 FR 4670), we 
proposed a standard Federal rate of $38,086.04 for the 2007 LTCH PPS 
rate year based on the best available data and policies presented in 
that proposed rule. As we stated in that proposed rule, the standard 
Federal rate of $38,086.04 was already adjusted for differences in 
case-mix, wages, cost-of-living, and high-cost outlier (HCO) payments. 
Therefore, we did not propose to make additional adjustments in the RY 
2006 LTCH PPS standard Federal rate for those factors (70 FR 24180). In 
this final rule, we are revising Sec.  412.523(c)(3) to establish a 
standard Federal rate based on a zero percent update as discussed above 
in section V. B. of this final rule. Therefore, based on the zero 
percent update, the standard Federal rate for RY 2007 will be 
$38,086.04. Since the standard Federal rate for the 2007 LTCH PPS rate 
year has already been adjusted for differences in case-mix, wages, 
cost-of-living, and HCO payments, we are not making any additional 
adjustments in the standard Federal rate for these factors.

D. Calculation of LTCH Prospective Payments for the 2007 LTCH PPS Rate 
Year

    The basic methodology for determining prospective payment rates for 
LTCH inpatient operating and capital-related costs is set forth in 
Sec.  412.515 through Sec.  412.532. In accordance with Sec.  412.515, 
we assign appropriate weighting factors to each LTC-DRG to reflect the 
estimated relative cost of hospital resources used for discharges 
within that group as compared to discharges classified within other 
groups. The amount of the prospective payment is based on the standard 
Federal rate, established under Sec.  412.523, and adjusted for the 
LTC-DRG relative weights, differences in area wage levels, cost-of-
living in Alaska and Hawaii, HCOs, and other special payment provisions 
(SSOs under Sec.  412.529 and interrupted stays under Sec.  412.531).
    In accordance with Sec.  412.533, during the 5-year transition 
period, payment is based on the applicable transition blend percentage 
of the adjusted Federal rate and the reasonable cost-based payment rate 
unless the LTCH makes a one-time election to receive payment based on

[[Page 27828]]

100 percent of the Federal rate. A LTCH defined as ``new'' under Sec.  
412.23(e)(4) is paid based on 100 percent of the Federal rate with no 
blended transition payments (Sec.  412.533(d)). As discussed in the 
August 30, 2002 final rule (67 FR 56038), and in accordance with Sec.  
412.533(a), the applicable transition blends are as shown in Table 5.

                                 Table 5
------------------------------------------------------------------------
                                                            Reasonable
 Cost reporting periods beginning on or    Federal rate     cost-based
                  after                     percentage     payment rate
                                                            percentage
------------------------------------------------------------------------
October 1, 2002.........................              20              80
October 1, 2003.........................              40              60
October 1, 2004.........................              60              40
October 1, 2005.........................              80              20
October 1, 2006.........................             100               0
------------------------------------------------------------------------

    Accordingly, for cost reporting periods beginning during FY 2005 
(that is, on or after October 1, 2004, and on or before September 30, 
2005), blended payments under the transition methodology are based on 
40 percent of the LTCH's reasonable cost-based payment rate and 60 
percent of the adjusted LTCH PPS Federal rate. For cost reporting 
periods that begin during FY 2006 (that is, on or after October 1, 2005 
and on or before September 30, 2006), blended payments under the 
transition methodology will be based on 20 percent of the LTCH's 
reasonable cost-based payment rate and 80 percent of the adjusted LTCH 
PPS Federal rate. For cost reporting periods beginning on or after 
October 1, 2006 (FY 2007), Medicare payment to LTCHs will be determined 
entirely (100 percent) under the LTCH PPS Federal rate.
1. Adjustment for Area Wage Levels
a. Background
    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS Federal rate to account for differences in LTCH area wage levels at 
Sec.  412.525(c). The labor-related share of the LTCH PPS Federal rate, 
currently estimated by the excluded hospital with capital market 
basket, is adjusted to account for geographic differences in area wage 
levels by applying the applicable LTCH PPS wage index. The applicable 
LTCH PPS wage index is computed using wage data from inpatient acute 
care hospitals without regard to reclassification under sections 
1886(d)(8) or 1886(d)(10) of the Act. Furthermore, as we discussed in 
the August 30, 2002 LTCH PPS final rule (67 FR 56015), we established a 
5-year transition to the full wage adjustment. The applicable wage 
index phase-in percentages are based on the start of a LTCH's cost 
reporting period as shown in Table 6.

           Table 6.--LTCH PPS Wage Index Phase-In Percentages
------------------------------------------------------------------------
 Cost reporting periods beginning   Phase-In percentage of the full wage
           on or after                             index
------------------------------------------------------------------------
October 1, 2002..................  \1/5\ (20 percent).
October 1, 2003..................  \2/5\ (40 percent).
October 1, 2004..................  \3/5\ (60 percent).
October 1, 2005..................  \4/5\ (80 percent).
October 1, 2006..................  \5/5\ (100 percent).
------------------------------------------------------------------------

    For example, for cost reporting periods beginning on or after 
October 1, 2004 and on or before September 30, 2005 (FY 2005), the 
applicable LTCH wage index value is three-fifths of the applicable full 
LTCH PPS wage index value. Similarly, for cost reporting periods 
beginning on or after October 1, 2005 and on or before September 30, 
2006 (FY 2006), the applicable LTCH wage index value will be four-
fifths of the applicable full LTCH PPS wage index value. The wage index 
adjustment will be completely phased-in beginning with cost reporting 
periods beginning in FY 2007, that is, for cost reporting periods 
beginning on or after October 1, 2006, the applicable LTCH wage index 
value will be the full (five-fifths) LTCH PPS wage index value. As we 
established in the August 30, 2002 LTCH PPS final rule (67 FR 56018), 
the applicable full LTCH PPS wage index value is calculated from acute-
care hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act.
    In that same final rule (67 FR 56018), we stated that we would 
continue to reevaluate LTCH data as they become available and would 
propose to adjust the phase-in if subsequent data support a change. As 
we discussed in the RY 2006 LTCH PPS final rule (70 FR 24181), because 
the LTCH PPS was only recently implemented (slightly over 2 years) and 
because of the time lag in availability of cost report data, sufficient 
new data have not been generated that would enable us to conduct a 
comprehensive reevaluation of the appropriateness of adjusting the 
phase-in. As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 
4670), we have reviewed the most recent data (FY 2002 through FY 2004) 
available and did not find any evidence to support a change in the 5-
year phase-in of the wage index. Specifically, our statistical analysis 
still does not show a significant relationship between LTCHs' costs and 
their geographic location. Therefore, in that proposed rule, we did not 
propose a change to the phase-in of the adjustment for area wage levels 
under Sec.  412.525(c). We received no comments on the phase-in of the 
wage index. Therefore, as we proposed, we are making no change in the 
5-year phase-in of the wage index in this final rule.

[[Page 27829]]

b. Geographic Classifications/Labor Market Area Definitions
    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in establishing 
an adjustment for area wage levels under Sec.  412.525(c), the labor-
related portion of a LTCH's Federal prospective payment is adjusted by 
using an appropriate wage index based on the labor market area in which 
the LTCH is located. In the 2006 LTCH PPS rate year final rule (70 FR 
24184 through 24185), in Sec.  412.525(c), we revised the labor market 
area definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005 based on the Office of Management 
and Budget's (OMB) Core Based Statistical Area (CBSA) designations 
based on 2000 Census data because we believe that those new labor 
market area definitions will ensure that the LTCH PPS wage index 
adjustment most appropriately accounts for and reflects the relative 
hospital wage levels in the geographic area of the hospital as compared 
to the national average hospital wage level. As set forth in Sec.  
412.525(c)(2), a LTCH's wage index is determined based on the location 
of the LTCH in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C). An urban area under the LTCH PPS is 
defined at Sec.  412.64(b)(1)(ii)(A) and (B). In general, an urban area 
is defined as a Metropolitan Statistical Area (MSA) as defined by the 
OMB. (In addition, a few counties located outside of MSAs are 
considered urban as specified at Sec.  412.64(b)(1)(ii)(B).) Under 
Sec.  412.64(b)(1)(ii)(C), a rural area is defined as any area outside 
of an urban area.
    We note that these are the same CBSA-based designations implemented 
for acute care inpatient hospitals under the IPPS at Sec.  412.64(b) 
effective October 1, 2004 (69 FR 49026 through 49034). For further 
discussion of the labor market area (geographic classification) 
definitions used under the LTCH PPS, see the 2006 LTCH PPS rate year 
final rule (70 FR 24182 through 24191).
c. Labor-Related Share
    In the August 30, 2002 LTCH PPS final rule (67 FR 56016), we 
established a labor-related share of 72.885 percent based on the 
relative importance of the labor-related share of operating costs 
(wages and salaries, employee benefits, professional fees, postal 
services, and all other labor-intensive services) and capital costs of 
the excluded hospital with capital market basket based on FY 1992 data. 
In the June 6, 2003 final rule (68 FR 34142), in conjunction with our 
revision and rebasing of the excluded hospital with capital market 
basket from a FY 1992 to a FY 1997 base year, we discussed revising the 
labor-related share based on the relative importance of the labor-
related share of operating and capital costs of the excluded hospital 
with capital market basket based on FY 1997 data. However, in the June 
6, 2003 final rule (68 FR 34142), while we adopted the revised and 
rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update 
factor for the 2004 LTCH PPS rate year, we decided not to update the 
labor-related share under the LTCH PPS pending further analysis of the 
current labor share methodology.
    In LTCH PPS final rules subsequent to the FY 2003 LTCH PPS final 
rule in which we established the current labor-related share (68 FR 
34142, 69 FR 25685 through 25686 and 70 FR 24182), we explained that 
the primary reason that we did not update the LTCH PPS labor-related 
share for the 2004, 2005 and 2006 LTCH PPS rate years was because of 
data and methodological concerns, which was the same reason for not 
updating the labor-related share under the IPPS for FY 2004 (68 FR 
45467 through 45468) and FY 2005 (69 FR 49069)), which are equally 
applicable to the LTCH PPS. We indicated that we would conduct further 
analysis to determine the most appropriate methodology and data for 
determining the labor-related share. We also stated that we would 
propose to update the IPPS and excluded hospital labor-related shares, 
if necessary, once our research is complete.
    In the FY 2006 IPPS final rule, the labor-related share under the 
IPPS that is ``estimated by the Secretary from time to time'' as 
specified in section 1886(d)(3)(E) of the Act was revised and rebased 
based on the FY 2002-based IPPS hospital market basket for discharges 
occurring on or after October 1, 2005 using our established methodology 
of defining the labor-related share as the national average proportion 
of operating costs that are attributable to wages and salaries, fringe 
benefits, professional fees, contract labor, and labor intensive 
services. Therefore, the IPPS labor-related share ``estimated by the 
Secretary from time to time'' was calculated by adding the relative 
weights for these operating cost categories. In that same final rule we 
stated that we continue to believe, as we stated in the past, that 
these operating cost categories likely are related to, are influenced 
by, or vary with the local markets (70 FR 47392 through 47393). (We 
note that section 403 of the MMA amended sections 1886(d)(3)(E) and 
1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 
62 percent as the labor-related share under the IPPS unless this 
employment ``would result in lower payments than would otherwise be 
made.'') In that same final rule, we also revised and rebased the 
excluded hospital market basket, which is used to update the reasonable 
cost-based portion of LTCHs' blended transition payments (70 FR 47399 
through 47403).
    As we stated previously, once our research into the labor-related 
share methodology was complete, we would update the IPPS and excluded 
hospital labor-related shares based on that research and the best 
available data if necessary. In the RY 2007 LTCH PPS proposed rule (71 
FR 4671 through 4672), we proposed to update the LTCH PPS labor-related 
share based on the proposed RPL market basket (which is described in 
section V.B. of this preamble). As explained in that proposed rule, we 
proposed to adopt the RPL market basket under the LTCH PPS because we 
believe that this market basket would be developed based on the best 
available data that reflect the cost structures of LTCHs. Therefore, we 
proposed to revise the LTCH PPS labor-related share from 72.885 percent 
(as established in the August 30, 2002 final rule (67 FR 56016) based 
on the FY 1997-based excluded hospital with capital market basket) to 
75.923 percent based on the relative importance of the labor-related 
share of operating costs (wages and salaries, employee benefits, 
professional fees, and all other labor-intensive services) and capital 
costs of the RPL market basket based on FY 2002 data. We also proposed 
that if more recent data become available before the publication of the 
final rule and if we ultimately revise the LTCH PPS labor-related share 
based on the proposed FY 2002-based RPL market basket, we would use 
that data to determine the labor-related share for the 2007 LTCH PPS 
rate year in the final rule.
    We received no comments on our proposal to update the LTCH PPS 
labor-related share based on the RPL market basket beginning in RY 
2007. (As discussed above, we received a few comments on our proposal 
to adopt the RPL market basket under the LTCH PPS. Those comments and 
responses are presented in section V.B. of this preamble.) Therefore, 
in this final rule, we are updating the LTCH PPS labor-related share 
based on the RPL market basket (which is described in section V.B. of 
this preamble). We are adopting the RPL market basket under the LTCH 
PPS because we believe that this market

[[Page 27830]]

basket was developed based on the best available data that reflect the 
cost structures of LTCHs. As discussed in section V.B. of this 
preamble, we now have data from the first quarter of 2006 in 
determining the FY 2002-based RPL market basket. Based on this more 
recent data, in this final rule, we are revising the LTCH PPS labor-
related share from 72.885 percent (as established in the August 30, 
2002 final rule (67 FR 56016) based on the FY 1997-based excluded 
hospital with capital market basket) to 75.665 percent based on the 
relative importance of the labor-related share of operating costs 
(wages and salaries, employee benefits, professional fees, and all 
other labor-intensive services) and capital costs of the RPL market 
basket based on FY 2002 data, as discussed in greater detail below in 
this final rule. As discussed in the RY 2007 LTCH PPS proposed rule (71 
FR 4672), consistent with our historical practice, the labor-related 
share is determined by identifying the national average proportion of 
operating costs that are related to, influenced by, or varies with the 
local labor market. Using our current definition of labor-related, the 
labor-related share is the sum of the relative importance of wages and 
salaries, fringe benefits, professional fees, labor-intensive services, 
and a portion of the capital share from an appropriate market basket. 
We are using the FY 2002-based RPL market basket costs to determine the 
labor-related share for the LTCH PPS effective for discharges occurring 
on or after July 1, 2006 as it is based on the most recent available 
data. The labor-related share for the 2007 LTCH PPS rate year will be 
the sum of the relative importance of each labor-related cost category, 
and will reflect the different rates of price change for these cost 
categories between the base year (FY 2002) and the 2007 LTCH PPS rate 
year. Based on the most recent available data, the sum of the relative 
importance for 2007 LTCH PPS rate year for operating costs (wages and 
salaries, employee benefits, professional fees, and labor-intensive 
services) will be 71.586, as shown in Table 7. The portion of capital 
that is influenced by the local labor market is estimated to be 46 
percent, which is the same percentage used in the FY 1997-based 
excluded hospital with capital market basket currently used under the 
LTCH PPS. Since the relative importance for capital will be 8.867 
percent of the FY 2002-based RPL market basket for the 2007 LTCH PPS 
rate year based on the latest available data, we are multiplying the 
estimated portion of capital influenced by the local labor market (46 
percent) by the relative importance for capital of the FY 2002-based 
RPL market basket (8.867 percent) to determine the labor-related share 
of capital for the 2007 LTCH PPS rate year. The result will be 4.079 
percent (0.46 x 8.867 percent), which we add to 71.586 percent for the 
operating cost amount to determine the total labor-related share for 
the 2007 LTCH PPS rate year. Thus, based on the latest available data, 
we are using a labor-related share of 75.665 percent under the LTCH PPS 
for the 2007 LTCH PPS rate year. This labor-related share is determined 
using the same methodology as employed in calculating the current LTCH 
labor-related share (67 FR 56016).
    Table 7 shows the 2007 LTCH PPS rate year relative importance 
labor-related share using the FY 2002-based RPL market basket and the 
current relative importance labor-related share using the FY 1997-based 
excluded hospital with capital market basket.

  Table 7.--Total Labor-Related Share--Relative Importance for the 2007
 for the RPL Market Basket and the Excluded Hospital With Capital Market
                                 Basket
------------------------------------------------------------------------
                                                           FY 1997-based
                                           FY 2002-based     excluded
                                            RPL market     hospital with
                                              basket      capital market
                                             relative         basket
              Cost category                 importance      importance
                                           (percent) for     (percent
                                           the 2007 LTCH  currently used
                                           PPS rate year  under relative
                                                           the LTCH PPS)
------------------------------------------------------------------------
Wages and salaries......................          52.506          48.021
Employee benefits.......................          14.042          11.534
Professional fees.......................           2.886           4.495
Postal Services*........................  ..............           0.635
All other labor-intensive services**....           2.152           4.411
                                         -------------------------------
    Subtotal............................          71.586          69.096
                                         ===============================
Labor-related share of capital costs....           4.079           3.222
                                         ===============================
        Total...........................          75.665         72.318
------------------------------------------------------------------------
* No longer considered labor related.
** Other labor intensive services includes landscaping services,
  services to buildings, detective and protective services, repair
  services, laundry services, advertising, auto parking and repairs,
  physical fitness facilities, and other government enterprises.

d. Wage Index Data
    In the RY 2006 LTCH PPS final rule (70 FR 24190 through 24191), we 
established LTCH PPS wage index values for the 2006 LTCH PPS rate year 
calculated from the same data (generated in cost reporting periods 
beginning during FY 2000) used to compute the FY 2005 acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act because that was the best available data at that time. The LTCH 
wage index values applicable for discharges occurring on or after July 
1, 2005 through June 30, 2006 are shown in Table 1 (for urban areas) 
and Table 2 (for rural areas) in the Addendum to the RY 2006 LTCH PPS 
final rule. Acute care hospital inpatient wage index data are also used 
to establish the wage index adjustment used in the IRF PPS, HHA PPS, 
and SNF PPS. As we discussed in the August 30, 2002 LTCH PPS final

[[Page 27831]]

rule (67 FR 56019), since hospitals that are excluded from the IPPS are 
not required to provide wage-related information on the Medicare cost 
report and because we would need to establish instructions for the 
collection of this LTCH data in order to establish a geographic 
reclassification adjustment under the LTCH PPS, the wage adjustment 
established under the LTCH PPS is based on a LTCH's actual location 
without regard to the urban or rural designation of any related or 
affiliated provider.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4673), under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA to determine appropriate 
adjustments under the LTCH PPS, for the 2007 LTCH PPS rate year, we 
proposed to use the same data (generated in cost reporting periods 
beginning during FY 2002) that was used to compute the FY 2006 acute 
care hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act to determine the applicable wage index values under the LTCH 
PPS because these data (FY 2002) are the most recent complete data. In 
that same proposed rule, we explained that we are continuing to propose 
to use IPPS wage data as a proxy to determine the LTCH wage index 
values for the 2007 LTCH PPS rate year because both LTCHs and acute-
care hospitals are required to meet the same certification criteria set 
forth in section 1861(e) of the Act to participate as a hospital in the 
Medicare program and they both compete in the same labor markets, and 
therefore experience similar wage-related costs. We also noted that 
these data are the same FY 2002 acute care hospital inpatient wage data 
that were used to compute the FY 2006 wage indices currently used under 
the IPPS, SNF PPS and HHA PPS. The proposed wage index values that 
would be applicable for discharges occurring on or after July 1, 2006 
through June 30, 2007 are shown in Table 1 (for urban areas) and Table 
2 (for rural areas) in the Addendum to the RY 2007 LTCH PPS proposed 
rule (71 FR 4747 through 4771).
    We received no comments on the proposed wage index values that 
would be applicable for discharges occurring on or after July 1, 2006 
through June 30, 2007. Therefore, in this final rule, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA to determine appropriate 
adjustments under the LTCH PPS, for the 2007 LTCH PPS rate year, we are 
using the same data (generated in cost reporting periods beginning 
during FY 2002) that was used to compute the FY 2006 acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act to determine the applicable wage index values under the LTCH 
PPS because these data (FY 2002) are the most recent complete data. We 
are continuing to use IPPS wage data as a proxy to determine the LTCH 
wage index values for the 2007 LTCH PPS rate year because both LTCHs 
and acute-care hospitals are required to meet the same certification 
criteria set forth in section 1861(e) of the Act to participate as a 
hospital in the Medicare program and they both compete in the same 
labor markets, and therefore experience similar wage-related costs. 
These data are the same FY 2002 acute care hospital inpatient wage data 
that were used to compute the FY 2006 wage indices currently used under 
the IPPS, SNF PPS and HHA PPS. The LTCH wage index values that will be 
applicable for discharges occurring on or after July 1, 2006 through 
June 30, 2007, are shown in Tables 1 (for urban areas) and Tables 2 
(for rural areas) in the Addendum to this final rule.
    As discussed in section V.D.1.a. of this preamble, the applicable 
wage index phase-in percentages are based on the start of a LTCH's cost 
reporting period beginning on or after October 1st of each year during 
the 5-year transition period. Thus, for cost reporting periods 
beginning on or after October 1, 2004 and before October 1, 2005 (FY 
2005), the labor portion of the standard Federal rate is adjusted by 
three-fifths of the applicable LTCH wage index value. For cost 
reporting periods beginning on or after October 1, 2005 and before 
October 1, 2006 (FY 2006), the labor portion of the standard Federal 
rate is adjusted by four-fifths of the applicable LTCH wage index 
value. Specifically, for a LTCH's cost reporting period beginning 
during FY 2006, for discharges occurring on or after July 1, 2006 
through June 30, 2007, the applicable wage index value will be four-
fifths of the full FY 2006 acute care hospital inpatient wage index 
data, without taking into account geographic reclassification under 
sections 1886(d)(8) and (d)(10) of the Act (shown in Tables 1 and 2 in 
the Addendum to this final rule).
    Because the phase-in of the wage index does not coincide with the 
LTCH PPS rate year (July 1st through June 30th), most LTCHs will 
experience a change in the wage index phase-in percentages during the 
LTCH PPS rate year. For example, during the 2007 LTCH PPS rate year, 
for a LTCH with a January 1 fiscal year, the four-fifths wage index 
will be applicable for the first 6 months of the 2007 LTCH PPS rate 
year (July 1, 2006 through December 31, 2006) and the full (five-
fifths) wage index will be applicable for the second 6 months of the 
2007 LTCH PPS rate year (January 1, 2007 through June 30, 2007). We 
also note that some providers will still be in the third year of the 5-
year phase-in of the LTCH wage index (that is, those LTCHs who entered 
the 5-year phase-in during their cost reporting periods that began 
between July 1, 2003 and September 30, 2003). For the remainder of 
those LTCHs' FY 2005 cost reporting periods that will coincide with the 
first 3 months of RY 2007, the applicable wage index value will be 
three-fifths of the full FY 2006 acute care hospital inpatient wage 
index data, without taking into account geographic reclassification 
under sections 1886(d)(8) and (d)(10) of the Act (as shown in Tables 1 
and 2 in the Addendum to this final rule). Since there are no longer 
any LTCHs in their cost reporting period that began during FY 2003 and 
FY 2004 (the first and second years of the 5-year wage index phase-in), 
we are no longer showing the \1/5\ and \2/5\ wage index values in 
Tables 1 and 2 in the Addendum to this final rule.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs incurred 
in those States. In the RY 2006 LTCH PPS final rule (70 FR 24191), for 
the 2006 LTCH PPS rate year, we established that we make a COLA to 
payments for LTCHs located in Alaska and Hawaii by multiplying the 
standard Federal payment rate by the appropriate factor listed in Table 
I. of that same final rule.
    Similarly, in the RY 2007 LTCH PPS proposed rule (71 FR 4673 
through 4674), under broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of the BIPA to 
determine appropriate adjustments under the LTCH PPS, for the 2007 LTCH 
PPS rate year we proposed to make a COLA to payments to LTCHs located 
in Alaska and Hawaii by multiplying the standard Federal payment rate 
by the factors listed in Table 8 of that proposed rule because those 
were currently the most recent available data. Those factors were 
obtained from the U.S. Office of

[[Page 27832]]

Personnel Management (OPM) and are currently used under the IPPS. In 
addition, we also proposed that if OPM releases revised COLA factors 
before March 1, 2006, we would use them for the development of the 
payments for the 2007 LTCH rate year and publish them in the LTCH PPS 
final rule.
    We received no comments on the proposed COLA factors for LTCHs 
located in Alaska and Hawaii for RY 2007. We also note that OPM has not 
released revised COLA factors since the publication of the RY 2007 LTCH 
PPS proposed rule. Therefore, in this final rule, under broad authority 
conferred upon the Secretary by section 123 of the BBRA as amended by 
section 307(b) of the BIPA to determine appropriate adjustments under 
the LTCH PPS, for the 2007 LTCH PPS rate year we are making a COLA to 
payments to LTCHs located in Alaska and Hawaii by multiplying the 
standard Federal payment rate by the factors listed in Table 8 because 
these are currently the most recent available data. These factors are 
obtained from OPM and are currently used under the IPPS.

    Table 8.--Cost-of-Living Adjustment Factors for Alaska and Hawaii
                Hospitals for the 2007 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
  All areas..................................................       1.25
Hawaii:
  Honolulu County............................................       1.25
  Hawaii County..............................................      1.165
  Kauai County...............................................     1.2325
  Maui County................................................     1.2375
  Kalawao County.............................................     1.2375
------------------------------------------------------------------------

3. Adjustment for High-Cost Outliers (HCOs)
a. Background
    Under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of the BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. Providing additional 
payments for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise be 
caused by treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We set 
the outlier threshold before the beginning of the applicable rate year 
so that total estimated outlier payments are projected to equal 8 
percent of total estimated payments under the LTCH PPS. Outlier 
payments under the LTCH PPS are determined consistent with the IPPS 
outlier policy.
    Under Sec.  412.525(a), we make outlier payments for any discharges 
if the estimated cost of a case exceeds the adjusted LTCH PPS payment 
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the 
amount used to limit the loss that a hospital will incur under the 
outlier policy for a case with unusually high costs. This results in 
Medicare and the LTCH sharing financial risk in the treatment of 
extraordinarily costly cases. Under the LTCH PPS HCO policy, the LTCH's 
loss is limited to the fixed-loss amount and a fixed percentage of 
costs above the marginal cost factor. We calculate the estimated cost 
of a case by multiplying the overall hospital cost-to-charge ratio 
(CCR) by the Medicare allowable covered charge. In accordance with 
Sec.  412.525(a)(3), we pay outlier cases 80 percent of the difference 
between the estimated cost of the patient case and the outlier 
threshold (the sum of the adjusted Federal prospective payment for the 
LTC-DRG and the fixed-loss amount).
    Under the LTCH PPS, we determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the LTCH PPS for a case with 
unusually high costs before the LTCH will receive any additional 
payments. We calculate the fixed-loss amount by estimating aggregate 
payments with and without an outlier policy. The fixed-loss amount will 
result in estimated total outlier payments being projected to be equal 
to 8 percent of projected total LTCH PPS payments. Currently, MedPAR 
claims data and CCRs based on data from the most recent provider 
specific file (PSF) (or to the applicable Statewide average CCR if a 
LTCH's CCR data are faulty or unavailable) are used to establish a 
fixed-loss threshold amount under the LTCH PPS.
b. Cost-To-Charge Ratios (CCRs)
    In determining outlier payments, we calculate the estimated cost of 
the case by multiplying the LTCH's overall CCR by the Medicare 
allowable charges for the case.
    As we discussed in greater detail in the June 9, 2003 IPPS HCO 
final rule (68 FR 34506 through 34516), because the LTCH PPS HCO policy 
(Sec.  412.525) is modeled after the IPPS outlier policy, we believed 
that it and the SSO policy (Sec.  412.529) are susceptible to the same 
payment vulnerabilities that became evident under the IPPS, and 
therefore, merited revision. Thus, we revised the HCO policy at Sec.  
412.525(a) and short-stay policy at Sec.  412.529 in that same final 
rule for the determination of LTCHs' CCRs and the reconciliation of 
outlier payments.
    As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4674), 
under the LTCH PPS, a single prospective payment per discharge is made 
for both inpatient operating and capital-related costs, and therefore, 
we compute a single ``overall'' or ``total'' CCR for LTCHs based on the 
sum of their operating and capital costs (as described in Chapter 3, 
section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-
4)) as compared to total charges. Specifically, a LTCH's CCR is 
calculated by dividing a LTCH's total Medicare costs (that is, the sum 
of its operating and capital inpatient routine and ancillary costs) 
divided by its total Medicare charges (that is, the sum of its 
operating and capital inpatient routine and ancillary charges).
    In the RY 2007 LTCH PPS proposed rule (71 FR 4674 through 4676, and 
4690 through 4692), we discussed our current methodology for 
determining hospitals' CCRs under the LTCH PPS HCO and SSO policies, 
and we presented a proposal to refine our methodology for determining 
the annual CCR ceiling and statewide average CCRs. In that same 
proposed rule, we also discussed our existing policy for the 
reconciliation of LTCH PPS high-cost and SSO payments along with our 
proposal to codify in subpart O of part 412 those policies, including 
proposed modifications and editorial clarifications to the existing 
policies.
    Historically, annual updates to the LTCH CCR ceiling and statewide 
average CCRs have been effective October 1. In the RY 2007 LTCH PPS 
proposed rule, we proposed revisions to the policies governing the 
determination of LTCHs' CCRs and the reconciliation of HCO and SSO 
payments which would be effective October 1, 2006. In addition, we 
stated that the specific LTCH CCR ceiling and statewide average CCRs 
reflecting these proposed policy changes, which would be effective 
October 1, 2006, and would be presented in the annual IPPS proposed and 
final rules.
    We received a few specific comments concerning the proposed changes 
to the policies governing the determination of LTCHs' CCRs. Several 
other commenters referenced one of the specific comments of another 
commenter on the proposed changes to the methodology for determining 
LTCH CCRs in their own comments on the RY 2007 LTCH PPS proposed rule. 
Based on a commenter's synopsis of our proposed changes

[[Page 27833]]

concerning the determination of LTCH's CCRs, we believe that the 
commenters clearly understood the nature and purpose of the proposed 
changes. However, the commenters stated that in the RY 2007 LTCH PPS 
proposed rule, we did not provide an analysis of the effect of the 
proposed change, nor did we provide an example of the new CCR values 
under this proposed methodology. Another commenter did not ``object in 
concept to the proposed combination of [IPPS] operating and capital 
cost-to-charge ratios' to compute a ``total'' CCR for each IPPS 
hospital by adding together each hospital's operating CCR and its 
capital CCR from which to compute the LTCH CCR ceiling and applicable 
statewide average CCRs. However, the commenter also pointed out that we 
did not provide any impact data and requested that we defer adoption of 
the proposed change until such data are provided for comment. 
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24126 through 
24135), we again proposed these same changes to the policies governing 
the determination of LTCHs' CCRs and the reconciliation of HCO and SSO 
payments that we proposed in the RY 2007 LTCH PPS proposed rule. Along 
with that proposal, we also included in that IPPS proposed rule the 
values of the proposed LTCH CCR ceiling (1.131) and the proposed 
statewide average LTCH CCRs (as shown in Table 8C of the FY 2007 IPPS 
proposed rule; 71 FR 24377) that would be effective October 1, 2006, 
based on our proposed policy changes (along with the proposed values of 
the LTCH CCR ceiling and statewide average CCRs that would be 
determined under our current methodology). Therefore, in this final 
rule, we are not finalizing any changes to the policies governing the 
determination of LTCHs' CCRs or the reconciliation of LTCH PPS HCO and 
SSO payments. We will further respond to any comments received on the 
proposal concerning changes to the policies governing the determination 
of LTCHs' CCRs and the reconciliation of LTCH PPS HCO and SSO payments 
presented again in the FY 2007 IPPS proposed rule (71 FR 24126 through 
24132) in the FY 2007 IPPS final rule that will be published this 
summer.
c. Establishment of the Fixed-Loss Amount
    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 final rule (67 FR 56022 through 56026), under the broad authority 
of section 123 of the BBRA as amended by section 307(b) of the BIPA, we 
established a fixed-loss amount so that total estimated outlier 
payments are projected to equal 8 percent of total estimated payments 
under the LTCH PPS. To determine the fixed-loss amount, we estimate 
outlier payments and total LTCH PPS payments for each case using claims 
data from the MedPAR files. Specifically, to determine the outlier 
payment for each case, we estimate the cost of the case by multiplying 
the Medicare covered charges from the claim by the LTCH's hospital 
specific CCR. Under Sec.  412.525(a)(3), if the estimated cost of the 
case exceeds the outlier threshold (the sum of the adjusted Federal 
prospective payment for the LTC-DRG and the fixed-loss amount), we pay 
an outlier payment equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal prospective payment for the LTC-DRG and the fixed-loss 
amount).
    In the RY 2006 LTCH PPS final rule (70 FR 24194), in calculating 
the fixed-loss amount that would result in outlier payments projected 
to be equal to 8 percent of total estimated payments for the 2006 LTCH 
PPS rate year, we used claims data from the December 2004 update of the 
FY 2004 MedPAR files and CCRs from the December 2004 update of the PSF, 
as that was the best available data at that time. As we discussed in 
that same final rule (70 FR 24193 through 24194), we believe that CCRs 
from the PSF were the best available CCR data for determining LTCHs' 
PPS payments during the 2006 LTCH PPS rate year because they were the 
most recently available CCRs (at that time) actually used to make LTCH 
PPS payments.
    As we also discussed in the RY 2006 LTCH PPS rate year final rule 
(70 FR 24192 through 24193), we calculated a single fixed-loss amount 
for the 2006 LTCH PPS rate year based on the version 22.0 of the 
GROUPER, which was the version in effect as of the beginning of the 
LTCH PPS rate year (that is, July 1, 2005 for the 2006 LTCH PPS rate 
year). In addition, we applied the current outlier policy under Sec.  
412.525(a) in determining the fixed-loss amount for the 2006 LTCH PPS 
rate year; that is, we assigned the applicable Statewide average CCR 
only to LTCHs whose CCRs exceeded the ceiling (and not when they fell 
below the floor). Accordingly, we used the FY 2005 IPPS combined 
operating and capital CCR ceiling of 1.409 (70 FR 24192). (Our 
rationale for using the FY 2005 combined IPPS operating and capital CCR 
ceiling for LTCHs is stated in section V.D.3.b. of this preamble.) As 
noted in that same final rule, in determining the fixed-loss amount for 
the 2006 LTCH PPS rate year using the CCRs from the PSF, there were no 
LTCHs with missing CCRs or with CCRs in excess of the current ceiling 
and, therefore, there was no need for us to independently assign the 
applicable Statewide average CCR to any LTCHs in determining the fixed-
loss amount for the 2006 LTCH PPS rate year (as this may have already 
been done by the FI in the PSF in accordance with the established 
policy).
    Accordingly, in the RY 2006 LTCH PPS final rule (70 FR 24194), we 
established a fixed-loss amount of $10,501 for the 2006 LTCH PPS rate 
year. Thus, we pay an outlier case 80 percent of the difference between 
the estimated cost of the case and the outlier threshold (the sum of 
the adjusted Federal LTCH PPS payment for the LTC-DRG and the fixed-
loss amount of $10,501).
    In the RY 2007 LTCH PPS proposed rule (71 FR 4676 through 4678), we 
used the June 2005 update of the FY 2004 MedPAR claims data to 
determine a fixed-loss amount that would result in outlier payments 
projected to be equal to 8 percent of total estimated payments, based 
on the policies described in that proposed rule, because those data 
were the most recent complete LTCH data available at that time. 
Furthermore, we proposed to determined the fixed-loss amount based on 
the version of the GROUPER that would be in effect as of the beginning 
of the 2007 LTCH PPS rate year (July 1, 2006), that is, Version 23.0 of 
the GROUPER (70 FR 47324).
    As also discussed in the RY 2007 LTCH PPS proposed rule (71 FR 
4676), we used CCRs from the June 2005 update of the PSF for 
determining the fixed-loss amount for the 2007 LTCH PPS rate year as 
they were the most recent complete available data at that time. We 
further proposed that if more recent CCR data are available, we propose 
to use it for determining the fixed-loss amount for the 2007 LTCH PPS 
rate year in the final rule. In determining the proposed fixed-loss 
amount for the 2007 LTCH PPS rate year, we also used the current FY 
2006 applicable IPPS combined operating and capital CCR ceiling of 
1.423 and Statewide average CCRs (as discussed in the FY 2006 IPPS 
final rule (70 FR 47496) and established in Transmittal 692 (September 
30, 2005)) such that the current applicable Statewide average CCR will 
be assigned if, among other things, a LTCH's CCR exceeded the current 
ceiling (1.423). As explained in the RY 2007 LTCH PPS proposed rule (71 
FR 4677), our rationale for using the existing LTCH CCR ceiling and

[[Page 27834]]

Statewide average CCRs to determine the proposed RY 2007 fixed-loss 
amount even though we proposed to change our methodology for 
determining the CCR ceiling and Statewide average CCRs effective for 
discharges occurring on or after October 1, 2006, was because, based on 
our analysis of the data used to determine the FY 2006 LTCH CCR 
ceiling, we believe that the proposed methodology change would result 
in a minor change in the numerical value of the LTCH CCR ceiling, and 
therefore, would have a negligible effect on the LTCHs' CCRs used to 
determine the proposed fixed-loss amount for the 2007 LTCH PPS rate 
year. Moreover, as we noted in that same proposed rule, in determining 
the proposed fixed-loss amount for the 2007 LTCH PPS rate year using 
the CCRs from the PSF, there was no need for us to independently assign 
the applicable Statewide average CCR to any LTCHs (as this may have 
already been done by the FI in the PSF in accordance with our 
established policy).
    In the RY 2007 LTCH PPS proposed rule (71 FR 4677), based on the 
data and policies described in that proposed rule, the proposed fixed-
loss amount would be $18,489 for the 2007 LTCH PPS rate year. Thus, we 
would pay an outlier case 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal LTCH payment for the LTC-DRG and the fixed-loss amount 
of $18,489). We also noted that the proposed fixed-loss amount for the 
2007 LTCH PPS rate year was significantly higher than the current 
fixed-loss amount of $10,501. In that proposed rule, we explained that 
the change in the proposed fixed-loss amount was primarily due to the 
projected decrease in LTCH PPS payments resulting from the proposed 
change in the SSO policy under Sec.  412.529 and the changes to the 
LTC-DRG relative weights for FY 2006. Specifically, because we 
projected approximately an 11 percent decrease in aggregate LTCH PPS 
payments in the 2007 LTCH PPS rate year based on the proposed policies 
presented in the proposed rule, we believed that a proposed increase in 
the fixed-loss amount would be appropriate and necessary to maintain 
the requirement that estimated outlier payments would equal 8 percent 
of estimated total LTCH PPS payments, as required under Sec.  
412.525(a). Maintaining the proposed fixed-loss amount at the current 
level would result in HCO payments that significantly exceed the 
current regulatory requirement that estimated outlier payments will be 
projected to equal 8 percent of estimated total LTCH PPS payments.
    We also noted that in the August 30, 2002 final rule (67 FR 56022 
through 56024), based on our regression analysis, we established the 
outlier target at 8 percent of estimated total LTCH PPS payments to 
allow us to achieve a balance between the ``conflicting considerations 
of the need to protect hospitals with costly cases, while maintaining 
incentives to improve overall efficiency.'' In that same final rule (67 
FR 56023), we also explained that our regression analysis showed that 
additional increments of outlier payments over 8 percent (that is, 
raising the outlier target to a larger percentage than 8 percent) would 
reduce financial risk, but by successively smaller amounts. Since 
outlier payments are included in budget neutrality calculations, 
outlier payments would be funded by prospectively reducing the non-
outlier PPS payment rates by the proportion of projected outlier 
payments to projected total PPS payments in the absence of outlier 
payments; the higher the outlier target, the greater the (prospective) 
reduction to the base payment rate in order to maintain budget 
neutrality. Therefore, as another alternative to the proposed increase 
to the fixed-loss amount for RY 2007, in the RY 2007 LTCH PPS proposed 
rule (71 FR 4677 through 4678), we solicited comments on whether we 
should revisit the regression analysis discussed above in this section 
that was used to establish the existing 8 percent outlier target, using 
the most recent available data to evaluate whether the current outlier 
target of 8 percent should be adjusted, and therefore may result in 
less of an increase in the fixed-loss amount for RY 2007.
    As an alternative to proposing to raise the fixed-loss amount for 
FY 2007, in the RY 2007 LTCH PPS proposed rule (71 FR 4677), we also 
examined adjusting the marginal cost factor (that is, the percentage 
that Medicare will pay of the estimated cost of a case that exceeds the 
sum of the adjusted Federal prospective payment for the LTC-DRG and the 
fixed-loss amount for LTCH PPS outlier cases as specified in Sec.  
412.525(a)(3)), as a means of ensuring that estimated outlier payments 
would be projected to equal 8 percent of estimated total LTCH PPS 
payments. As we established in the August 30, 2002 final rule (67 FR 
56022 through 56026), under the LTCH PPS HCO policy at Sec.  
412.525(a)(3), the marginal cost factor is currently equal to 80 
percent. A marginal cost factor equal to 80 percent means that, for an 
outlier case, we pay the LTCH 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal rate for the LTC-DRG PPS payment and the fixed-loss 
amount).
    Comment: Several commenters opposed any option that would allow CMS 
to revisit the regression analysis that was used to establish the 
existing 80 percent marginal cost factor and existing outlier target of 
8 percent. The commenters explained that the LTCH PPS is still in its 
early stages and further changes to the marginal cost factor or 8 
percent outlier target would result in instability to the system. The 
commenters cautioned against making any premature changes to the 
factors affecting HCO payments to LTCHS, particularly the marginal cost 
factor and outlier target established by regulation. Also, the 
commenters agreed that keeping the marginal cost factor at 80 percent 
and the outlier pool at 8 percent better identifies LTCH patients that 
are truly unusually costly cases, and that the policy appropriately 
addresses outlier cases that are significantly more expensive than non-
outlier cases.
    One commenter expressed concern about the proposed significant 
increase to the fixed-loss amount for RY 2007 and urged CMS to exempt 
LTCHs that have high case mix levels (that is, over 1.5) from this 
policy since they are more likely to have high cost cases. As an 
alternative, the commenter suggested that we increase the marginal cost 
factor to 90 percent or 100 percent instead of 80 percent.
    Response: We agree with the commenters that based on the regression 
analysis done for the implementation of the LTCH PPS (August 30, 2002; 
68 FR 56022 through 56026), keeping the marginal cost factor at 80 
percent and the outlier pool at 8 percent best identifies LTCH patients 
that are truly unusually costly cases, and that such a policy 
appropriately addresses LTCH HCO cases that are significantly more 
expensive than non-outlier cases. Furthermore, as we stated in the 
August 30, 2002 final rule (67 FR 56023 through 56027) that implemented 
the LTCH PPS, the marginal cost factor is designed to ensure ``a 
balance between the need to protect LTCHs financially, while 
encouraging them to treat expensive patients and maintaining the 
incentives of a PPS to improve the efficient delivery of care.'' 
Therefore, as supported by many commenters, we did not revisit the 
regression analysis that was used to establish the existing 80 percent 
marginal cost factor and existing outlier target of 8 percent for this 
final rule. Accordingly, we are not making

[[Page 27835]]

any changes to the marginal cost factor or outlier target for RY 2007 
in this final rule.
    We do not believe that it is necessary or appropriate to exempt 
LTCHs that have a high CMI from any changes to the HCO policy that 
would be established for RY 2007. We disagree with the commenter that a 
high case mix necessarily correlates to a higher likelihood of having 
unusually HCO cases. A LTCH's case-mix is defined as its case weighted 
average LTC-DRG relative weight for all its discharges in a given 
period. The relative weight for each LTC-DRG represents the resources 
needed by an average inpatient LTCH case in that LTC-DRG. For example, 
cases in an LTC-DRG with a relative weight of 2.0 will, on average, 
cost twice as much as cases in an LTC-DRG with a weight of 1.0, and 
therefore, on average, are paid twice as much as well. Thus, a ``high'' 
case-mix level is an indication of the level of intensity of the types 
of patients treated at a LTCH and not necessarily an indication of 
treating a large number of unusually high cost cases. In fact, LTCHs 
could have a relatively ``high'' CMI but have few or no HCO cases. 
Therefore, we are not adopting the commenters' suggestion to exempt 
LTCHs that have high case mix levels from any changes to the HCO policy 
that would be established for RY 2007.
    Furthermore, increasing the marginal cost factor to 90 percent or 
100 percent instead of 80 percent for hospitals with high case-mix 
would result in an increase in total estimated outlier payments 
because, as we explained in the RY 2006 LTCH PPS final rule (70 FR 
24195), we would pay a larger percentage of the estimated costs that 
exceed the outlier threshold (the sum of the adjusted Federal rate for 
the LTC-DRG and the fixed-loss amount). For example, if we were to 
increase the marginal cost factor to 90 percent without raising the 
fixed-loss amount or 8 percent outlier target, we would pay outlier 
cases an additional 10 percent (90 percent minus 80 percent) of the 
estimated costs that exceed the outlier threshold. This alternative 
would result in estimated outlier payments which would exceed the 
existing 8 percent outlier target required by the regulations.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4677), 
keeping the marginal cost factor at the current level of 80 percent 
while proposing to raise the fixed-loss amount to a level that will 
generate an estimated aggregate 8 percent outlier payments would afford 
more financial protection to LTCHs than proposing to lower the marginal 
cost factor and retain the current fixed loss amount. A relatively 
higher fixed-loss amount identifies fewer cases as HCO cases since the 
amount that the estimated cost of the case must exceed before the case 
qualifies as a HCO case is higher. However, this policy better 
identifies LTCH patients that are truly unusually costly cases, which 
is consistent with our intent of the LTCH HCO policy as stated when we 
implemented the LTCH PPS in the August 30, 2002 final rule (67 FR 
56025). As we discussed in that same final rule (67 FR 56023 through 
56024), our analysis of payment-to-cost ratios for outlier cases showed 
that a marginal cost factor of 80 percent appropriately addresses 
outlier cases that are significantly more expensive than nonoutlier 
cases, while simultaneously maintaining the integrity of the LTCH PPS. 
Therefore, as supported by several commenters, we are not revising the 
existing 80 percent marginal cost factor, and are not adopting the 
commenter's recommendation to increase the marginal cost factor.
    To summarize, consistent with the regression analysis that was used 
to establish the existing marginal cost factor and existing outlier 
target for RY 2007, the marginal cost factor will remain at 80 percent 
and estimated outlier payments will remain at 8 percent. As we stated 
in the RY 2007 LTCH PPS proposed rule (71 FR 4678), after revisiting 
the issue and an analysis of the most recent complete available data, 
due to the lag time in the availability of data, we now believe the 
most appropriate time to revisit any changes in the outlier policy 
(among other things), which would affect future LTCH PPS payment rates, 
would be after the conclusion of the 5-year transition period when we 
expect to have several years of data generated after the implementation 
of the LTCH PPS.
    Comment: One commenter believes that the estimated proposed 
reduction to aggregate LTCH PPS payments that would result from the 
proposed changes to the SSO policy causes a ``perverse'' consequence of 
an increase to the fixed-loss amount, thus lowering reimbursement for 
long-term, high cost cases. The commenter believes that LTCHs would 
suffer a double penalty of lower payments due to the proposed SSO 
policy and the proposed increase to the HCO fixed-loss amount. The 
commenter added that CMS has not provided an explanation how LTCHs 
would finance the added cost of these long stay, high cost cases (as a 
result of the proposed increase to the outlier threshold).
    One commenter noted that the proposed increase to the fixed-loss 
amount would cause hospitals that do not have many SSO cases to be 
inadequately reimbursed for their high cost cases. The commenter also 
added that the proposed increase to the fixed-loss amount coupled with 
the proposed zero percent increase to the Federal Rate would serve as a 
disincentive for LTCHs to accept patients with high costs and who also 
exceed the ALOS, thereby affecting patient access for these cases.
    Another commenter stated that the proposed increase to the outlier 
threshold failed to consider the acuity of patients and is based only 
on mathematics. The commenter added that the proposed adjustment to the 
fixed-loss amount would increase LTCHs' loss on these cases before they 
qualify for an additional payment as HCOs. The commenter recommended 
that if CMS believes an increase to the fixed-loss amount is warranted, 
CMS should increase the fixed-loss amount the same amount as the annual 
update factor.
    Several other commenters also expressed concern about the 
significant proposed increase to the fixed-loss amount and along with 
other commenters requested that CMS review and reconsider the proposed 
increase to the fixed-loss amount and consider establishing a lower 
fixed loss amount (than the proposed fixed-loss amount) for RY 2007 in 
the LTCH PPS final rule so that HCO cases receive appropriate payments.
    Response: While we understand the commenters concerns about the 
proposed increase to the fixed-loss amount, as we discussed in the RY 
2007 LTCH PPS proposed rule (71 FR 4677), the proposed increase to the 
fixed-loss amount had a direct correlation to our estimated decrease in 
aggregate LTCH PPS payments for RY 2007 that we projected would result 
primarily due to the proposed changes to the SSO policy.
    Although some of the commenters did suggest different alternatives 
to updating the fixed-loss amount, those suggestions are either not 
consistent with maintaining estimated outlier payments at the projected 
8 percent of total estimated payments or would require us to lower the 
marginal cost factor in order to maintain estimated outlier payments at 
8 percent of total estimated payments, which several commenters 
opposed. As we discussed above and consistent with the recommendation 
of several commenters, we did not revisit the regression analysis that 
was used as a basis to

[[Page 27836]]

establish the existing marginal cost factor and existing 8 percent 
outlier target, the marginal cost factor will remain at 80 percent and 
the outlier target will remain at 8 percent for RY 2007. Maintaining 
the fixed-loss amount at the current level, as we discussed in the RY 
2007 LTCH PPS proposed rule (71 FR 4677) would result in HCO payments 
that significantly exceed the current regulatory requirement that 
estimated outlier payments are projected to equal 8 percent of 
estimated total LTCH PPS payments. Based on our regression analysis, we 
established the outlier target at 8 percent of estimated total LTCH PPS 
payments to allow us to achieve a balance between the ``conflicting 
considerations of the need to protect hospitals with costly cases, 
while maintaining incentives to improve overall efficiency.'' That 
regression analysis also showed that additional increments of outlier 
payments over 8 percent (that is, raising the outlier target to a 
larger percentage than 8 percent) would reduce financial risk, but by 
successively smaller amounts. Outlier payments are budget neutral, and 
therefore, outlier payments are funded by prospectively reducing the 
non-outlier PPS payment rates by projected total outlier payments. The 
higher the outlier target, the greater the (prospective) reduction to 
the base payment that would need to be applied to the Federal rate in 
order to maintain budget neutrality (August 30, 2002; 67 FR 56022 
through 56024).
    As we also discussed in the RY 2007 LTCH PPS proposed rule (71 FR 
4678), under the LTCH PPS HCO policy at Sec.  412.525(a)(3), at a 
marginal cost factor equal to 80 percent, Medicare pays the LTCH 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the adjusted Federal rate for the 
LTC-DRG PPS payment and the fixed-loss amount). The marginal cost 
factor is designed to ensure ``a balance between the need to protect 
LTCHs financially, while encouraging them to treat expensive patients 
and maintaining the incentives of a prospective payment system to 
improve the efficient delivery of care.'' Our regression analysis 
showed that a marginal cost factor of 80 percent appropriately 
addresses outlier cases that are significantly more expensive than 
nonoutlier cases. Specifically, our analysis of payment-to-cost ratios 
for outlier cases showed that a marginal cost factor of 80 percent 
appropriately addresses outlier cases that are significantly more 
expensive than nonoutlier cases, while simultaneously maintaining the 
integrity of the LTCH PPS. Thus, the existing outlier policy (that is, 
the 8 percent outlier target in conjunction with the 80 percent 
marginal cost factor) derived from our regression analysis is designed 
to maintain the balance between providing an incentive for LTCHs to 
treat expensive patients and improving the efficient delivery of care. 
(August 30, 2002; (67 FR 56022 through 56026)
    As discussed in greater detail below, we continue to believe that 
an increase to the fixed-loss amount is appropriate. The intent of the 
HCO policy, as stated when we implemented the LTCH PPS, is to make an 
additional payment to LTCHs for cases that truly have unusually high 
costs. We disagree with the commenter who believes that LTCHs would be 
penalized twice by lowering payments as a result of the changes to the 
SSO policy and the increase to the HCO fixed-loss amount. Although the 
changes to the SSO policy result in an estimated decrease in aggregate 
LTCH PPS payments, which necessitates an increase to the HCO fixed-loss 
amount, as discussed above, we are maintaining the existing 8 percent 
outlier target. Therefore, although we are lowering aggregate estimated 
outlier payments; they will continue to be projected to be equal to 8 
percent of total estimate LTCH PPS payments. However, we acknowledge 
that an increase to the fixed-loss amount will increase a LTCH's loss 
on a specific case before it qualifies for an additional payment as 
HCOs, as pointed out a few commenters; however, as we explained in the 
RY 2007 LTCH PPS proposed rule (71 FR 4678), because a relatively 
higher fixed-loss amount identifies fewer cases as HCO cases (since the 
amount that the estimated cost of the case must exceed before the case 
qualifies as a HCO case is higher), such a policy better identifies 
LTCH patients that are truly unusually costly cases.
    As discussed above, the intent of the HCO policy is to provide an 
additional payment to LTCH cases that truly have unusually high costs. 
We would remind the commenter who pointed out that we did not provide 
an explanation of how LTCHs would finance HCO cases with an increase to 
the fixed-loss amount that, if we would not increase the fixed-loss 
amount, HCO payments would represent significantly more than 8 percent 
of estimated total LTCH PPS payments. Thus, the cases that would 
receive an additional HCO payment would no longer represent the cases 
that truly have unusually high costs as compared to the universe of 
``typical'' LTCH cases, and warrant an additional HCO payment. 
Furthermore, as discussed above, HCO payments are budget neutral and 
are funded by prospectively reducing the non-outlier PPS payment rates 
by projected total outlier payments. The higher the outlier target, the 
greater the (prospective) reduction to the base payment that would need 
to be applied to the Federal rate in order to maintain budget 
neutrality. Therefore, we continue to believe that it is appropriate to 
increase the fixed-loss amount in order to maintain outlier payments at 
the projected 8 percent of total estimated payments. Such a policy 
continues to appropriately identify cases that are truly HCO cases 
(that is, cases with an unusually high cost). Because maintaining an 8 
percent outlier target necessitates an increase to the fixed-loss 
amount and will appropriately identify unusually costly cases, we do 
not believe that increasing the fixed-loss amount will result in a 
disincentive for LTCHs to accept patients with high costs or exceed the 
ALOS. In fact, for LTCHs, in general, a case that should receive a high 
cost outlier payment is typically high cost because the patient has a 
longer than ALOS. Moreover, the industry has stated in many of its 
comments submitted on the RY 2007 LTCH PPS proposed rule that it has no 
way of determining a LTCH's LOS upon admission. Therefore, we do not 
believe that the increase to the fixed-loss amount established in this 
final rule, which is significantly lower than the proposed RY 2007 
fixed-loss amount (as discussed below), will result in these patients 
not being treated at LTCHs. Furthermore, as we discuss in the impact 
analysis presented in section XV. of this final rule, since based on 
our margins analysis LTCH PPS payments appear to be more than adequate 
to cover the costs of the efficient delivery of care to patients at 
LTCHs, based on this margins analysis, we do not expect that an 
increase to the fixed-loss amount will result in an adverse financial 
impact on affected LTCHs nor will there be an effect on beneficiaries' 
access to care. Also, for the reasons discussed above, we are not 
adopting the commenter's suggestion to update the fixed-loss by the 
most recent estimate of the LTCH PPS market basket since that would 
result in estimated outlier payments in excess of 8 percent of 
estimated total LTCH PPS payments. Because an increase in HCO payments 
would result in an offset to the Federal rate, thereby lowering the 
payment rate to all LTCH cases, such a result could underpay inlier 
LTCH cases that typically consume the average resource of the 
particular LTC-DRG.

[[Page 27837]]

    In response to the commenter that believes that the estimated 
proposed changes to the SSO policy causes a ``perverse'' consequence of 
an increase to the fixed-loss amount, we believe that it is 
inappropriate to maintain the current (that is, lower) fixed-loss 
amount, which would increase aggregate estimated outlier payments 
beyond 8 percent. The HCO policy was intended to identify only a 
limited percentage of aggregate LTCH PPS payments for an additional 
payment for unusually costly cases. As noted above, the LTCH PPS HCO 
policy is budget neutral and, therefore, reduces payments to LTCHs for 
SSO cases, many of which most likely do not require the full measure of 
resources available in a hospital that has been established to treat 
patients requiring long-stay hospital-level care (as discussed in 
greater detail below in section V.A.1.a. of this preamble). As 
explained in the RY 2007 LTCH PPS proposed rule (71 FR 4677), the 
proposed increase to the fixed-loss amount was primarily due to the 
projected decrease in aggregate LTCH PPS payments resulting from the 
change in the SSO policy in order to maintain the requirement that 
estimated outlier payments would equal only 8 percent of estimated 
total LTCH PPS payments, as required under Sec.  412.525(a). If we 
would not increase the fixed-loss amount, HCO payments would represent 
significantly more than 8 percent of estimated total LTCH PPS payments. 
Thus, the cases that would receive an additional HCO payment would no 
longer represent the cases that truly have unusually high costs as 
compared to the universe of ``typical'' LTCH cases, and warrant an 
additional HCO payment. This is because, as we discussed in the August 
30, 2002 final rule (67 FR 56022) when we implemented the LTCH PPS, our 
regression analysis showed that an 8 percent outlier target would 
achieve the balance of reducing financial risk for the treatment of 
unusually costly cases, reducing incentives to underserve costly 
beneficiaries, and improving overall fairness of the PPS. Furthermore, 
we note that the 8 percent outlier target under the LTCH PPS is 
significantly higher than the outlier target under the IPPS. The 
outlier thresholds under the IPPS are set so that operating IPPS 
outlier payments are projected to be only 5.1 percent of total 
operating IPPS DRG payments (70 FR 47501).
    Several commenters based their comments on the assumption that long 
lengths of stay or high patient acuity (for example, case-mix) are 
directly related to whether a case should receive a HCO payment. As we 
explained above in section IV.C.3. of this preamble, we do not agree 
that a case with a high case-mix necessarily correlates to a higher 
likelihood of the case having an unusually high cost. A case with a 
``high case-mix'' is a case that is grouped to a LTC-DRG with a 
``high'' relative weight. The relative weight of the LTC-DRG represents 
the resources needed by an average inpatient LTCH case in that LTC-DRG. 
For example, cases in an LTC-DRG with a relative weight of 2.0 will, on 
average, cost twice as much as cases in a LTC-DRG with a weight of 1.0, 
and therefore, on average, are paid twice as much as well. Thus, a 
``high'' case-mix for a particular case is an indication of the 
relatively ``high'' level of intensity of that patient relative to LTCH 
patients in other LTC-DRGs but not necessarily an indication of 
unusually high cost for patients within that LTC-DRG. In fact, a case 
could have a relatively ``high'' case-mix (that is, in a LTC-DRG with a 
``high'' relative weight and therefore higher LTC-DRG payment) but have 
the same costs or cost less than other cases in that same LTC-DRG, 
which receive an appropriate payment based on the relative weight of 
that LTC-DRG. Therefore, as discussed in greater detail above, we 
believe that an increase to the fixed-loss amount is appropriate in 
order to maintain the requirement that estimated outlier payments equal 
8 percent of estimated total LTCH PPS payments, a level, which based on 
our regression analysis, we believe most appropriately identifies 
unusually high cost cases.
    The policy change for SSO cases established in this final rule (as 
discussed in section IV.A.1.a. of this preamble) is intended to revise 
payments for SSO cases to an appropriate level. The fact that a 
particular LTCH does not treat many SSO cases does not have any impact 
on the effect of the change to the SSO policy on the HCO fixed-loss 
amount. This is because, under our existing HCO policy, estimated 
aggregate outlier payments are projected to equal 8 percent of 
estimated aggregate LTCH PPS payments. As discussed in greater detail 
above, the intent of the HCO policy is to provide an additional payment 
to LTCH cases that truly have unusually high costs. We would remind 
commenters who stated that an increase to the fixed-loss amount would 
cause LTCHs that do not have many SSO cases to be inadequately 
reimbursed for their HCO cases, that if we would not increase the 
fixed-loss amount, cases that do not necessarily represent cases that 
truly have unusually high costs as compared to the universe of 
``typical'' LTCH cases would receive a HCO payment. Furthermore, if we 
were to raise aggregate HCO payments in excess of the current 8 percent 
outlier target, we would have to lower the Federal rate by the amount 
that projected total outlier payments would exceed the current 8 
percent outlier target. Such a prospective adjustment to the Federal 
rate would reduce payments to ``typical'' LTCH cases, which based on 
our regression analysis, could result in inadequate reimbursement to 
those inlier cases. Therefore, we disagree with the commenters that an 
increase to the fixed-loss amount would cause LTCHs that do not have 
many SSO cases to be inadequately reimbursed for their HCO cases.
    In conclusion, in 2003, when we became aware that IPPS and LTCH PPS 
HCO (and SSO) policies were susceptible to payment vulnerabilities, we 
proposed and ultimately finalized changes to the HCO (and SSO) policies 
that were in the regulations at that time. Historically, it is our 
practice that when upon review of an existing policy and we find that a 
change in that policy is necessary, we establish appropriate changes 
through the notice and comment rulemaking process. Consistent with this 
historical practice, we reviewed the current HCO policy at Sec.  
412.525(a), as discussed in greater detail above. As recommended by 
many commenters, we have reviewed our methodology for determining the 
fixed-loss amount for RY 2007 in this final rule to ensure that both 
LTCH HCO cases and LTCH inlier cases receive appropriate payments 
(since, as discussed above, outlier payments under the LTCH PPS are 
budget neutral). Accordingly, based on this review, as we discussed in 
the RY 2007 LTCH PPS proposed rule and as we discuss in greater detail 
above in this section, we believe that an increase to the fixed-loss 
amount for RY 2007 is appropriate. We are using the same methodology 
that we proposed to use in the RY 2007 proposed rule to calculate the 
fixed-loss amount for RY 2007 in this final rule (using updated data 
and the policies established in this final rule, as described below) in 
order to maintain estimated outlier payments at the projected 8 percent 
of total estimated payments. However, as we discuss in greater detail 
below in section V.A.1.a of this preamble, based on the comments we 
received concerning the proposed changes to the SSO policy, we are 
revising our proposed changes to the SSO policy that will be 
established in this final rule. We

[[Page 27838]]

estimate that the final SSO policy established in this final rule will 
result in a significantly smaller decrease in aggregate LTCH PPS 
payments for RY 2007. Accordingly, although the fixed-loss amount for 
RY 2007 is higher than current fixed-loss amount ($10,501), since under 
the final SSO policy aggregate payments will no longer be reduced by 
over 11 percent, but rather we estimate aggregate payments will only be 
reduced by about 4 percent. Therefore, to maintain estimated outlier 
payments at the projected 8 percent of total estimated payments, it is 
not necessary for us to raise the fixed-loss amount as much as in the 
RY 2007 LTCH PPS proposed rule. Consequently, the final fixed-loss 
amount for RY 2007 (discussed in greater detail below) is $14,887, 
which is considerably less than the proposed RY 2007 fixed-loss amount 
of $18,489.
    As stated above, we annually determine the fixed-loss amount so 
that estimated outlier payments are projected to equal 8 percent of 
total estimated LTCH PPS payments. In this final rule for the 2007 LTCH 
PPS rate year, we used the December 2005 update of the FY 2005 MedPAR 
claims data to determine a fixed-loss amount that would result in 
outlier payments projected to be equal to 8 percent of total estimated 
payments, based on the policies described in this final rule, because 
these data are the most recent complete LTCH data available. 
Furthermore, as noted previously, we determined the fixed-loss amount 
based on the version of the GROUPER that would be in effect as of the 
beginning of the 2007 LTCH PPS rate year (July 1, 2006), that is, 
Version 23.0 of the GROUPER (70 FR 47324).
    We also used CCRs from the December 2005 update of the PSF for 
determining the fixed-loss amount for the 2007 LTCH PPS rate year as 
they are currently the most recent complete available data. In 
determining the fixed-loss amount for the 2007 LTCH PPS rate year, we 
are using the current FY 2006 applicable IPPS combined operating and 
capital CCR ceiling of 1.423 and Statewide average CCRs (as discussed 
in the FY 2006 IPPS final rule (70 FR 47496) and established in 
Transmittal 692 (September 30, 2005)) such that the current applicable 
Statewide average CCR would be assigned if, among other things, a 
LTCH's CCR exceeded the current ceiling (1.423). Our reason for using 
the existing LTCH CCR ceiling and Statewide average CCRs to determine 
the RY 2007 fixed-loss amount even though we have proposed to change 
our methodology for determining the CCR ceiling and Statewide average 
CCRs effective for discharges occurring on or after October 1, 2006 in 
the FY 2007 IPPS proposed rule (71 FR 23996), is because we believe 
that this methodology change would result in a minor change in the 
numerical value of the LTCH CCR ceiling based on our analysis of the 
data used to determine the proposed FY 2007 LTCH CCR ceiling, and 
therefore, would have a negligible effect on the LTCHs' CCRs used to 
determine the fixed-loss amount for the 2007 LTCH PPS rate year. 
Moreover, we note that in determining the fixed-loss amount for the 
2007 LTCH PPS rate year using the CCRs from the PSF, there was no need 
for us to independently assign the applicable Statewide average CCR to 
any LTCHs (as this may have already been done by the FI in the PSF in 
accordance with our established policy). (Currently, the applicable FY 
2006 IPPS Statewide averages can be found in Tables 8A and 8B of the FY 
2006 IPPS final rule (70 FR 47672).)
    Accordingly, based on the data and policies described in this final 
rule, the fixed-loss amount will be $14,887 for the 2007 LTCH PPS rate 
year. Thus, we will pay an outlier case 80 percent of the difference 
between the estimated cost of the case and the outlier threshold (the 
sum of the adjusted Federal LTCH payment for the LTC-DRG and the fixed-
loss amount of $14,887). We note that the fixed-loss amount for the 
2007 LTCH PPS rate year is higher than the current fixed-loss amount of 
$10,501. This change in the fixed-loss amount will primarily be due to 
the projected decrease in LTCH PPS payments resulting from the change 
in the SSO policy under Sec.  412.529 (discussed in greater detail in 
section VI.A.1. of this preamble), and the changes to the LTC-DRG 
relative weights for FY 2006 (as discussed in the FY 2006 IPPS final 
rule (70 FR 47355)). Because we are projecting approximately a 4 
percent decrease in estimated aggregate LTCH PPS payments in the 2007 
LTCH PPS rate year (as discussed in section XV. of this final rule), we 
believe that an increase in the fixed-loss amount is appropriate and 
necessary to maintain the requirement that estimated outlier payments 
would equal 8 percent of estimated total LTCH PPS payments, as required 
under Sec.  412.525(a). As discussed in greater detail above, an 
outlier target of 8 percent of estimated total LTCH PPS payments allows 
us to achieve a balance between the ``conflicting considerations of the 
need to protect hospitals with costly cases, while maintaining 
incentives to improve overall efficiency'' (67 FR 56022 through 56024).
    We note that the fixed-loss amount of $14,887 is substantially 
lower than the proposed RY 2007 fixed-loss amount of $18,489 (71 FR 
4676 through 4678). Furthermore, we note that the fixed-loss amount of 
$14,887 is significantly lower than the FY 2003 fixed-loss amount of 
$24,450 (67 FR 56023), the 2004 LTCH PPS rate year fixed-loss amount of 
$19,590 (68 FR 34144), and the 2005 LTCH PPS rate year fixed-loss 
amount of $17,864 (69 FR 25688), all of which were in effect during the 
time period that we are currently estimating positive Medicare margins 
(as discussed in greater detail in section V.C.3 of this preamble). 
Thus, during the years when the fixed-loss amount was greater than the 
$14,887 established for RY 2007 in this final rule, the majority of 
LTCHs operated with positive Medicare margins, and therefore, we do not 
expect that a fixed-loss amount of $14,887 will result in an adverse 
impact of LTCHs in RY 2007. Moreover, we believe the fixed-loss amount 
of $14,887 will appropriately identify unusually costly LTCH cases 
while maintaining the integrity of the LTCH PPS. Thus, under the broad 
authority of section 123(a)(1) of the BBRA and section 307(b)(1) of the 
BIPA, we are establishing a fixed-loss amount of $14,887 based on the 
best available LTCH data and the policies presented in this final rule 
because, we believe an increase in the fixed-loss amount is appropriate 
and necessary to maintain estimated outlier payments equal to 8 percent 
of estimated total LTCH PPS payments, as required under Sec.  
412.525(a).
d. Reconciliation of Outlier Payments Upon Cost Report Settlement
    In the June 9, 2003 HCO final rule (68 FR 34508 through 34512), we 
established a policy for LTCHs that provided that, effective for LTCH 
PPS discharges occurring on or after August 8, 2003, any reconciliation 
of outlier payments will be based upon the actual CCR computed from the 
costs and charges incurred in the period during which the discharge 
occurs. In that same final rule, we also established that, for 
discharges occurring on or after August 8, 2003, at the time of any 
reconciliation, outlier payments may be adjusted to account for the 
time value of any underpayments or overpayments based upon a widely 
available index to be established in advance by the Secretary and will 
be applied from the midpoint of the cost reporting period to the date 
of reconciliation. (We note that, in that same final rule (68 FR 
34513), we

[[Page 27839]]

also established similar changes to the SSO policy under the LTCH PPS 
at Sec.  412.529(c)(5)(ii).) These changes regarding the reconciliation 
of outlier payments under the LTCH PPS were made in conjunction with 
the changes regarding the determination of LTCH's CCRs that we 
established under Sec.  412.525(a)(4) in the June 9, 2003 IPPS HCO 
final rule, as discussed in greater detail in section V.D.3.b. of this 
preamble. (We note that the instructions for implementing these 
regulations under both the IPPS and the LTCH PPS are discussed in 
further detail in Program Memorandum Transmittal A-03-058. Additional 
information on the administration of the reconciliation process under 
the IPPS is provided in CMS Program Transmittal 707 (October 12, 2005; 
Change Request 3966). We note that irrespective of the changes to the 
HCO and SSO policies presented in this final rule, we are currently 
developing additional instructions on the administration of the 
existing reconciliation process under the LTCH PPS that will be similar 
to the IPPS reconciliation process.)
    In the RY 2007 LTCH PPS proposed rule (71 FR 4678 through 4679), 
for discharges occurring on or after October 1, 2006, we proposed to 
codify into the LTCH PPS section of the regulations (subpart O of part 
42 of the CFR) the provisions concerning the reconciliation of LTCH PPS 
outlier payments, including editorial clarifications, that would more 
precisely describe the application of those policies along with the 
proposed changes to our methodology for determining the annual LTCH CCR 
ceiling and applicable Statewide average CCRs under the LTCH PPS 
(discussed previously in this final rule).
    As discussed above in section VI.D.3.b. of this preamble, we 
received a few specific comments concerning the proposed changes to the 
policies governing the determination of LTCHs' CCRs. In light of those 
comments, in the FY 2007 IPPS proposed rule (71 FR 24126 through 
24132), we proposed the same changes to the policies governing the 
determination of LTCHs' CCRs and the reconciliation of HCO and SSO 
payments that we proposed in the RY 2007 LTCH PPS proposed rule. 
Therefore, in this final rule, we are not finalizing any changes to the 
policies governing the determination of LTCHs' CCRs or the 
reconciliation of LTCH PPS HCO and SSO payments. We will respond 
further to any comments received on the proposal concerning changes to 
the policies governing the determination of LTCHs' CCRs and the 
reconciliation of LTCH PPS HCO and SSO payments presented again in the 
FY 2007 IPPS proposed rule (71 FR 24126 through 24135) in the FY 2007 
IPPS final rule that will be published this summer.
4. Other Payment Adjustments
    As indicated earlier, we have broad authority under section 
123(a)(1) of the BBRA as amended by section 307(b) of the BIPA to 
determine appropriate adjustments under the LTCH PPS, including whether 
(and how) to provide for adjustments to reflect variations in the 
necessary costs of treatment among LTCHs. Thus, in the August 30, 2002 
final rule (67 FR 56014 through 56027), we discussed our extensive data 
analysis and rationale for not implementing an adjustment for 
geographic reclassification, rural location, treating a 
disproportionate share of low-income patients (DSH), or indirect 
medical education (IME) costs. In that same final rule, we stated that 
we would collect data and reevaluate the appropriateness of these 
adjustments in the future once more LTCH data become available after 
the LTCH PPS is implemented.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4679 
through 4680), because the LTCH PPS has only been implemented for 
slightly over 3 years and there is a time lag in data availability, 
sufficient new data has not been generated that would enable us to 
conduct a comprehensive reevaluation of these payment adjustments. We 
now believe that after the completion of the 5-year transition, 
sufficient new data that will be generated while LTCHs are subject to 
the LTCH PPS may be available for a comprehensive reevaluation of 
payment adjustments such as geographic reclassification, rural 
location, DSH, and IME. Nonetheless, we reviewed the limited data that 
was available and find no evidence to support additional policy 
changes. Therefore, in that proposed rule, we did not propose to make 
any adjustments for geographic reclassification, rural location, DSH, 
or IME. We also stated that we will continue to collect and interpret 
new data as they become available in the future to determine if these 
data support proposing any additional payment adjustments. 
Specifically, as we discuss in greater detail in the RY 2007 LTCH PPS 
proposed rule (71 FR 4679 through 4680), we proposed to revisit the 
possible one-time prospective adjustment to the LTCH PPS rates at Sec.  
412.523(d)(3), and after further analysis and evaluation we now believe 
that it would be appropriate to wait for the conclusion of the 5-year 
transition to 100 percent fully Federal payments under the LTCH PPS, to 
maximize the availability of data that are reflective of LTCH behavior 
in response to the implementation of the LTCH PPS to be used to conduct 
a comprehensive evaluation of the potential payment adjustment policies 
(such as rural location, DSH and IME) in conjunction with our 
evaluation of the possibility of making a one-time prospective 
adjustment to the LTCH PPS rates provided for at Sec.  412.523(d)(3).
    We received no comments on any potential adjustments for geographic 
reclassification, rural location, DSH, or IME. In addition, we received 
no comments on our proposal to conduct a comprehensive reevaluation of 
payment adjustments such as geographic reclassification, rural 
location, DSH, and IME after the completion of the 5-year transition 
once sufficient new data is generated while LTCHs are subject to the 
LTCH PPS may be available. Therefore, in this final rule, we are not 
making any adjustments for geographic reclassification, rural location, 
DSH, or IME. Furthermore, we will conduct a comprehensive reevaluation 
of payment adjustments such as geographic reclassification, rural 
location, DSH, and IME after the completion of the 5-year transition 
once we believe that sufficient new data that has been generated while 
LTCHs are subject to the LTCH PPS is available.
5. Budget Neutrality Offset To Account for the Transition Methodology
    Under Sec.  412.533, we implemented a 5-year transition, during 
which a LTCH is paid an increasing percentage of the LTCH PPS Federal 
prospective payment and a decreasing percentage of its payments based 
on the reasonable cost-based payment methodology for each discharge. 
Furthermore, we allow a LTCH (other than those defined as ``new'' under 
Sec.  412.23(e)(4) to elect to be paid based on 100 percent of the 
standard Federal rate in lieu of the blended methodology.
    The standard Federal rate was determined as if all LTCHs will be 
paid based on 100 percent of the standard Federal rate. As stated 
earlier, we provide for a 5-year transition period that allows LTCHs to 
receive payments based partially on the reasonable cost-based 
methodology. In order to maintain budget neutrality for FY 2003 as 
required by section 123(a)(1) of the BBRA during the 5-year transition 
period, we reduce all LTCH Medicare payments (whether a LTCH elects 
payment based on 100 percent of the Federal rate or whether a LTCH is 
being paid under the transition blend

[[Page 27840]]

methodology) to account for the cost of the applicable transition 
period methodology in a given LTCH PPS rate year.
    Specifically, we reduce all LTCH Medicare payments during the 5-
year transition by a factor that is equal to 1 minus the ratio of the 
estimated TEFRA reasonable cost-based payments that would be made if 
the LTCH PPS was not implemented, to the projected total Medicare 
program PPS payments (that is, payments made under the transition 
methodology and the option to elect payment based on 100 percent of the 
Federal rate).
    In the RY 2006 LTCH PPS final rule (70 FR 24202), based on the best 
available data at that time, we projected that approximately 98 percent 
of LTCHs will be paid based on 100 percent of the standard Federal rate 
rather than receive payment under the transition blend methodology for 
the 2006 LTCH PPS rate year. Using the same methodology described in 
the August 30, 2002 final rule (67 FR 56034), this projection, which 
used updated data and inflation factors, was based on our estimate that 
either: (1) A LTCH has already elected payment based on 100 percent of 
the Federal rate prior to the start of the 2006 LTCH PPS rate year 
(July 1, 2005); or (2) a LTCH would receive higher payments based on 
100 percent of the 2006 LTCH PPS rate year standard Federal rate 
compared to the payments it would receive under the transition blend 
methodology. Similarly, we projected that the remaining 2 percent of 
LTCHs will choose to be paid based on the applicable transition blend 
methodology (as set forth under Sec.  412.533(a)) because they would 
receive higher payments than if they were paid based on 100 percent of 
the 2006 LTCH PPS rate year standard Federal rate.
    Also in the RY 2006 LTCH PPS final rule (70 FR 24202), based on the 
best available data at that time and policy revisions described in that 
same rule, we projected that the full effect of the remaining 2 years 
of the transition period (including the election option) would result 
in a cost to the Medicare program of approximately $1.675 million. 
Specifically, for the RY 2006 LTCH PPS, we estimated that the cost of 
the transition would be approximately $1 million. Because this amount 
is only a small percentage of total LTCH PPS payments for the 2006 LTCH 
PPS rate year (estimated at over $3 billion), the formula that we use 
to establish the budget neutrality offset to account for the additional 
costs of the transition period resulted in a factor of zero percent. 
Therefore, in that same final rule, we established a 0.0 percent 
reduction (a budget neutrality offset of 1.000) to all LTCH payments in 
the 2006 LTCH PPS rate year to account for the $1 million estimated 
cost of the transition period methodology (including the option to 
elect payment based on 100 percent of the Federal rate). We also 
indicated that we would use a budget neutrality offset for each of the 
remaining years of the transition period to account for the estimated 
costs for the respective LTCH PPS rate years. In that same final rule, 
we estimated that there would be a 0.0 percent budget neutrality offset 
to LTCH PPS payments during the remaining years of the transition 
period since, we estimated at that time that the additional cost to the 
Medicare program resulting from the transition period methodology would 
be so small that the budget neutrality factor determined under our 
established methodology would round to zero.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4680 through 4681), 
based on the updated data using the same methodology established in the 
August 30, 2002 final rule (67 FR 56034), we projected that 
approximately 97 percent of LTCHs would be paid based on 100 percent of 
the proposed standard Federal rate rather than receive payment under 
the transition blend methodology during the 2007 LTCH PPS rate year. 
Similarly, we projected that the remaining 3 percent of LTCHs would 
choose to be paid based on the transition blend methodology at Sec.  
412.533 because those payments are estimated to be higher than if they 
were paid based on 100 percent of the proposed standard Federal rate. 
The applicable transition blend percentage is applicable for a LTCH's 
entire cost reporting period beginning on or after October 1 (unless 
the LTCH elects payment based on 100 percent of the Federal rate). We 
also noted that this projection was slightly lower than the projection 
that 98 percent of LTCHs would be paid based on 100 percent of the 
proposed standard Federal rate rather than receive payment under the 
transition blend methodology during the 2006 LTCH PPS rate year 
discussed in the RY 2006 LTCH PPS final rule (70 FR 24202). The reason 
for this slight decrease is due to how our established methodology 
(described in this section) determines which LTCHs would be projected 
to receive payments based on 100 percent of the Federal rate in a given 
rate year. Specifically, under our established methodology, if a LTCH 
has not already elected payment based on 100 percent of the Federal 
rate then we evaluate whether a LTCH would receive higher payments 
based on 100 percent of the proposed standard Federal rate or under the 
applicable transition blend methodology based on the most recent 
available data. Based on the best available data at that time, we 
projected that a few LTCHs that had not already elected payment based 
on 100 percent of the Federal rate would make such an election for RY 
2006 because we projected that their payments based on 100 percent of 
the Federal rate would exceed their payments under the applicable 
transition blend. Therefore, those LTCHs were counted in the number of 
LTCHS that would be paid based on 100 percent of the Federal rate in RY 
2006. However, based on the most recent available data used for the RY 
2007 LTCH PPS proposed rule, the data showed that those LTCHs have not 
elected to receive payments based on 100 percent of the Federal rate 
and are being paid under the applicable transition blend methodology. 
Under our methodology for determining the percentage of LTCHs paid 
based on 100 percent of the federal rate, based on the most recent 
available data, in the RY 2007 LTCH PPS proposed rule, we projected 
that for the RY 2007 LTCH PPS rate year, the applicable transition 
blend methodology payments to those LTCHs would be greater than payment 
based on 100 percent of the Federal rate, and therefore, those LTCHs 
would not be included in the number of LTCHs that we estimate would be 
paid based on 100 percent of the Federal rate in RY 2007.
    Based on the policies presented in that proposed rule, we projected 
a decrease in their estimated payments based on 100 percent of the 
Federal rate in RY 2007 payment as compared to their estimated payments 
based on 100 percent of the Federal rate in RY 2006 primarily as a 
result of the proposed changes to the SSO policy and the proposed 
increase in the outlier fixed-loss amount. Because we projected a 
decrease in payments based on 100 percent of the Federal rate for these 
LTCHs, the estimated RY 2007 payments based on the applicable 
transition blend methodology are now higher than their estimated RY 
2007 payments based on 100 percent of the Federal rate, and therefore, 
we did not project that these LTCHs would elect payment based on 100 
percent of the Federal rate for RY 2007. Thus, the slight decrease in 
the our projection in the number of LTCHs that would be paid based on 
100 percent of the Federal rate for the 2007 LTCH PPS rate year is 
appropriate.
    Based on the best available data and the proposed policies 
described in the RY 2007 LTCH PPS proposed rule, we

[[Page 27841]]

projected that, in the absence of a transition budget neutrality 
offset, the full effect of the final full year of the transition period 
(including the election option) as compared to payments as if all LTCHs 
would be paid based on 100 percent of the Federal rate would result in 
a cost to the Medicare program of approximately 2.8 million. 
Accordingly, using the methodology established in the August 30, 2002 
LTCH PPS final rule (67 FR 56034), in the RY 2007 LTCH PPS proposed 
rule (71 FR 4681), we proposed a 0.1 percent reduction (a budget 
neutrality offset of 0.999) to all LTCHs' payments for discharges 
occurring on or after July 1, 2006 and through June 30, 2007, to 
account for the estimated cost of the transition period methodology 
(including the option to elect payment based on 100 percent of the 
Federal rate) of approximately $2.8 million for the 2007 LTCH PPS rate 
year.
    We received no comments on our proposed 0.1 percent reduction (a 
budget neutrality offset of 0.999) to all LTCHs' payments for 
discharges occurring on or after July 1, 2006 and through June 30, 
2007, to account for the estimated cost of the transition period 
methodology (including the option to elect payment based on 100 percent 
of the Federal rate). In this final rule, based on the updated data 
using the same methodology established in the August 30, 2002 final 
rule (67 FR 56034), we are projecting that approximately 98 percent of 
LTCHs will be paid based on 100 percent of the standard Federal rate 
rather than receive payment under the transition blend methodology 
during the 2007 LTCH PPS rate year. This projection, which used updated 
data, as described above, is based on our estimate that either: (1) A 
LTCH has already elected payment based on 100 percent of the Federal 
rate prior to the beginning of the 2007 LTCH PPS rate year (July 1, 
2006); or (2) a LTCH would receive higher payments based on 100 percent 
of the standard Federal rate compared to the payments they would 
receive under the transition blend methodology. Similarly, we project 
that the remaining 2 percent of LTCHs will choose to be paid based on 
the transition blend methodology at Sec.  412.533 because those 
payments are estimated to be higher than if they were paid based on 100 
percent of the standard Federal rate. The applicable transition blend 
percentage is applicable for a LTCH's entire cost reporting period 
beginning on or after October 1 (unless the LTCH elects payment based 
on 100 percent of the Federal rate). We note that this projection is 
slightly lower than the projection that 98 percent of LTCHs will be 
paid based on 100 percent of the standard Federal rate rather than 
receive payment under the transition blend methodology during the 2006 
LTCH PPS rate year discussed in the RY 2006 LTCH PPS final rule (70 FR 
24202). As discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4681) 
and as reiterated above, we believe that the slight decrease in our 
projection in the number of LTCHs that would be paid based on 100 
percent of the Federal rate for the 2007 LTCH PPS rate year is 
appropriate.
    Based on the best available data and the policies described in this 
final rule, we are projecting that in absence of a transition budget 
neutrality offset, the full effect of the final full year of the 
transition period (including the election option) as compared to 
payments as if all LTCHs will be paid based on 100 percent of the 
Federal rate would result in a negligible cost to the Medicare program. 
Specifically, based on the most recent available data, we estimate that 
the cost of the transition period methodology (including the option to 
elect payment based on 100 percent of the Federal rate) will be less 
than $1 million in RY 2007. As discussed above, to account for the cost 
of the transition methodology in a given LTCH PPS rate year during the 
5-year transition, we reduce all LTCH Medicare payments by a factor 
that is equal to 1 minus the ratio of the estimated reasonable cost-
based payments that would have been made if the LTCH PPS had not been 
implemented to the projected total Medicare program PPS payments (that 
is, payments made under the transition methodology and the option to 
elect payment based on 100 percent of the Federal rate). Because we 
estimate that the additional cost of the transition period methodology 
(including the option to elect payment based on 100 percent of the 
Federal rate) will be less than $1 million for the 2007 LTCH PPS rate 
year and because this amount is a small percentage of total LTCH PPS 
payments (estimated at over $5 billion, as shown in Table 9), the 
formula that we have used to establish the budget neutrality offset in 
prior years results in a factor (as described above) that we reduce all 
LTCH Medicare payments by to account for those additional costs of zero 
(as a function of rounding). In addition, as discussed in the RY 2007 
LTCH PPS proposed rule (71 FR 4681), we are no longer projecting a 
small cost for the 2008 LTCH PPS rate year (July 1, 2007 through June 
30, 2008) even though some LTCH's will have a cost reporting period for 
the 5th year of the transition period which will be concluding in the 
first 3 months of the 2008 LTCH PPS rate year because based on the most 
available data, we are projecting that the vast majority of LTCHs will 
have made the election to be paid based on 100 percent of the Federal 
rate rather than the transition blend which will result in a negligible 
cost to the Medicare program.)
    Accordingly, using the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56034), based on updated data and the 
policies and rates presented in this final rule, we are implementing a 
zero percent reduction (a budget neutrality offset of 1.000) to all 
LTCHs' payments for discharges occurring on or after July 1, 2006 and 
through June 30, 2007, to account for the estimated cost of the 
transition period methodology (including the option to elect payment 
based on 100 percent of the Federal rate) of less than $1 million for 
the 2007 LTCH PPS rate year.
    We note that this offset for the 2007 LTCH PPS rate year is the 
same as the current zero percent transition period budget neutrality 
offset established in the RY 2006 LTCH PPS final rule (70 FR 24202). We 
also note that the transition period budget neutrality offset for the 
2007 LTCH PPS rate year established in this final rule is slightly 
lower than the proposed 0.999 percent budget neutrality offset proposed 
in for the RY 2007 LTCH PPS proposed rule (71 FR 4681). This is because 
we are now projecting that a few more LTCHs will elect payment based on 
100 percent of the Federal rate than we projected when we determined 
the transition period budget neutrality offset for the 2007 LTCH PPS 
rate year based on the most recent available data in the RY 2007 LTCH 
PPS proposed rule because we are no longer projecting as large of a 
decrease in aggregate LTCH PPS payments for RY 2007 as a result of the 
policies established in this final rule.
6. One-time Prospective Adjustment to the Standard Federal Rate
    As we discussed in the August 30, 2002 final rule (67 FR 56036), 
consistent with the statutory requirement for budget neutrality in 
section 123(a)(1) of the BBRA, we intended that estimated aggregate 
payments under the LTCH PPS for FY 2003 equal the estimated aggregate 
payments that would be made if the LTCH PPS were not implemented. Our 
methodology for estimating payments for purposes of the budget 
neutrality calculations uses the best available data at the time and 
necessarily reflects assumptions. As the LTCH PPS progresses, we are

[[Page 27842]]

monitoring payment data and will evaluate the ultimate accuracy of the 
assumptions used in the budget neutrality calculations (for example, 
inflation factors, intensity of services provided, or behavioral 
response to the implementation of the LTCH PPS) described in the August 
30, 2002 LTCH PPS final rule (67 FR 56027 through 56037). To the extent 
these assumptions significantly differ from actual experience, the 
aggregate amount of actual payments may turn out to be significantly 
higher or lower than the estimates on which the budget neutrality 
calculations were based.
    Section 123(a)(1) of the BBRA as amended by section 307(b) of the 
BIPA provides broad authority to the Secretary in developing the LTCH 
PPS, including the authority for appropriate adjustments. Under this 
broad authority, as implemented in the existing regulations at Sec.  
412.523(d)(3), we have provided for the possibility of making a one-
time prospective adjustment to the LTCH PPS rates by October 1, 2006, 
so that the effect of any significant difference between actual 
payments and estimated payments for the first year of the LTCH PPS 
would not be perpetuated in the LTCH PPS rates for future years. (As 
discussed in greater detail below, as we proposed, we are extending the 
deadline for making this adjustment to July 1, 2008, in this final 
rule.)
    In the RY 2006 LTCH PPS final rule (70 FR 24203), based on the best 
available data at that time, we estimated that total Medicare program 
payments for LTCH services over the next 5 LTCH PPS rate years would be 
$3.32 billion for the 2006 LTCH PPS rate year; $3.38 billion for the 
2007 LTCH PPS rate year; $3.48 billion for the 2008 LTCH PPS rate year; 
$3.63 billion for the 2009 LTCH PPS rate year; and $3.79 billion for 
the 2010 LTCH PPS rate year.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4681), consistent with 
the methodology established in the August 30, 2002 final rule (67 FR 
56036), based on the most recent available data at that time, we 
estimate that total Medicare program payments for LTCH services for the 
next 5 LTCH PPS rate years would be $5.27 billion for the 2007 LTCH PPS 
rate year; $5.44 billion for the 2008 LTCH PPS rate year; $5.64 billion 
for the 2009 LTCH PPS rate year; $5.88 billion for the 2010 LTCH PPS 
rate year; and $6.15 billion for the 2011 LTCH PPS rate year. We also 
noted that those 5-year spending estimates were significantly higher 
that the 5-year spending estimates presented in the RY 2006 LTCH PPS 
final rule (70 FR 24203). We explained that this is primarily due to an 
adjustment by our Office of the Actuary (OACT) to account for the 
significant increase in the expected number of LTCH discharges based on 
the most recent available LTCH discharge data.
    In this final rule, consistent with the methodology established in 
the August 30, 2002 final rule (67 FR 56036), based on the most recent 
available data, we estimate that total Medicare program payments for 
LTCH services for the next 5 LTCH PPS rate years would be as shown in 
Table 9.

  Table 9.--Rate Year Estimate Total Medicare Program Payments for LTCH
                                Services
------------------------------------------------------------------------
                                                             Estimated
                   LTCH PPS rate year                     payments ($ in
                                                             billions)
------------------------------------------------------------------------
2007....................................................           $5.27
2008....................................................            5.43
2009....................................................            5.63
2010....................................................            5.86
2011....................................................            6.13
------------------------------------------------------------------------

    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56037), these estimates are based on 
the most recent available data, including the projection that 98 
percent of LTCHs would elect to be paid based on 100 percent of the 
2007 LTCH PPS rate year standard Federal rate rather than the 
applicable transition blend and an estimated increase in the number of 
discharges from LTCHs. These estimates are also based on our estimate 
of LTCH PPS rate year payments to LTCHs using OACT's most recent 
estimate of the excluded hospital with capital market basket (currently 
used under the LTCH PPS) of 3.4 percent for the 2007 LTCH PPS rate 
year, 3.1 percent for the 2008 LTCH PPS rate year, 2.8 percent for the 
2009 LTCH PPS rate year, 2.3 percent for the 2010 LTCH PPS rate year, 
and 2.7 percent for the 2011 LTCH PPS rate year. (We note that, 
although we are establishing a zero percent update to the LTCH PPS 
Federal rate for RY 2007 (as discussed in section V.C.3. of this final 
rule) OACT develops its spending projections based on existing policy 
and therefore, changes that have not yet been implemented are not 
reflected in the spending projections shown in this section.) We also 
considered OACT's most recent projections of changes in Medicare 
beneficiary enrollment that there would be a change in Medicare fee-
for-service beneficiary enrollment of -0.3 percent in the 2007 LTCH PPS 
rate year, 0.1 percent in the 2008 LTCH PPS rate year, 0.2 percent in 
the 2009 LTCH PPS rate year, -0.3 percent in the 2010 LTCH PPS rate 
year, and -0.2 percent in the 2011 LTCH PPS rate year. (We note that, 
based on the most recent available data, OACT is projecting a slight 
decrease in Medicare fee-for-service Part A enrollment for the 2007, 
2009 and 2010 LTCH PPS rate years, in part, because they are projecting 
an increase in Medicare managed care enrollment as a result of the 
implementation of several provisions of the MMA of 2003.)
    As we discussed in the RY 2006 LTCH PPS final rule (70 FR 24204), 
because the LTCH PPS was only recently implemented, sufficient new data 
has not been generated that would enable us to conduct a comprehensive 
reevaluation of our budget neutrality calculations. Accordingly, we did 
not make a one-time adjustment under Sec.  412.523(d)(3). As discussed 
in the RY 2007 LTCH PPS proposed rule (71 FR 4682), at this time, we 
still do not have sufficient new data to enable us to conduct a 
comprehensive reevaluation of our budget neutrality calculations. 
Therefore, in that proposed rule, we did not propose to make a one-time 
adjustment under Sec.  412.523(d)(3) so that the effect of any 
significant difference between actual payments and estimated payments 
for the first year of the LTCH PPS is not perpetuated in the PPS rates 
for future years. However, in that same proposed rule, we stated that 
we will continue to collect and interpret new data as the data become 
available in the future to determine if this adjustment should be 
proposed.
    Additionally, as also discussed in the RY 2007 LTCH PPS proposed 
rule (71 FR 4682 through 4684), we believe that it would be appropriate 
to postpone the requirement established in Sec.  412.523(d)(3) due to 
the time lag in the availability of Medicare data upon which this 
adjustment would be based. We explained that we believe that only 
through a thorough analysis of the most comprehensive and accurate data 
from the first year of the implementation of the LTCH PPS for FY 2003 
(including settled and fully audited cost reports) would we be able to 
reliably determine whether the one-time prospective adjustment to the 
standard Federal rate, which if issued would have an impact on all 
future payments under the LTCH PPS, should be proposed. Therefore, we 
proposed to revise Sec.  412.523(d)(3) by postponing the October 1, 
2006 deadline to July 1, 2008.
    Comment: One commenter believes that CMS should be consistent and 
conduct the one-time adjustment in the same manner and for the same 
reasons as it has done for all PPSs. Specifically, the commenter states 
that both the LTCH PPS and the IRF PPS are affected

[[Page 27843]]

by changes in coding practices resulting from the implementation of a 
PPS; however, under the IRF PPS, CMS made a ``one-time'' adjustment 
when it reduced the standard payment conversion factor (that is, the 
IRF PPS base rate) by 1.9 percent in FY 2006 to account for changes in 
coding practices that did not reflect actual changes in patient 
severity based on an analysis performed by the Rand corporation. The 
commenter also believes it is inequitable to treat LTCHs differently 
than IRFs when accounting for payment increases due to changes in 
coding by potentially penalizing LTCHs twice for changes, once by 
providing no update and a second time, by extending the regulatory 
timeframe to establish the one-time adjustment to the Federal rate, 
since the proposed adjustment to account for case-mix increase that is 
not real in determining the update for RY 2007 would be a permanent 
adjustment that de facto reduces the rate of the increase of the 
Federal rate. Therefore, the commenter stated that CMS should eliminate 
the possible one-time adjustment as it would have already accomplished 
the purposes of that adjustment by proposing a zero percent update to 
the RY 2007 Federal rate.
    In referring to the transition period budget neutrality adjustment, 
one commenter states that CMS already employs a means to ensure budget 
neutrality, and therefore, the extension of the deadline for the one-
time budget neutrality adjustment is unnecessary. Another commenter 
stated that CMS should use the proposed zero percent update as the one-
time adjustment and not extend the deadline, while another commenter 
stated that CMS should pursue a one-time adjustment independent of the 
Federal rate update for RY 2007.
    Some commenters contend that for CMS to propose to extend the 
deadline for the possible one-time budget neutrality adjustment would 
constitute ``an abuse of its statutory authority.'' These commenters 
assert that by our own admission (citing the RY 2007 LTCH PPS proposed 
rule (71 FR 4682)), we are already in possession of the data that is 
needed to determine if the possible one-time budget neutrality 
adjustment under Sec.  412.523(d)(3) is necessary. The commenters 
question why if FY 2003 cost report data which is needed to determine 
if the possible one-time budget neutrality adjustment is currently 
available, we believe it is necessary to obtain more ``reliable'' cost 
data for FY 2004 before deciding to impose the one-time (budget 
neutrality) adjustment. These commenters believe that postponing the 
deadline would allow CMS to ``wait until `any significant difference' 
arises in the aggregate to trigger the [possibly] one-time [budget 
neutrality] adjustment.'' Consequently, they recommended that CMS 
withdraw its proposal to extend the deadline for exercising a one-time 
prospective adjustment. CMS would therefore only have until October 1, 
2006 to exercise the one-time adjustment, as originally contemplated.
    Response: The commenter believes that we are being inconsistent 
with our application of ``one-time'' adjustments under the IRF PPS and 
the LTCH PPS since, in the FY 2006 IRF PPS final rule (70 FR 47880), we 
applied a ``one-time'' adjustment of 1.9 percent to the standard 
payment amount for FY 2006 to account for changes in provider coding 
practices that did not reflect real changes in case mix, and in 
determining the update to the LTCH PPS Federal rate for RY 2007, we 
proposed to make an adjustment to account for changes in coding 
practices that do not reflect real changes in case mix in addition to 
the existing ``one-time'' budget neutrality adjustment at Sec.  
412.523(d)(3). However, we believe that the commenter has mistakenly 
assumed that the adjustment to the most recent estimate of the market 
basket to account for changes in coding practices in determining the 
proposed Federal rate for RY 2007 is the same as the possible one-time 
prospective adjustment provided for under Sec.  412.523(d)(3). As we 
stated above in this section, when we established the regulations at 
Sec.  412.523(d)(3), we provided for the possibility of making a one-
time prospective adjustment to the LTCH PPS rates so that the effect of 
any significant difference between actual payments and estimated 
payments for the first year of the LTCH PPS would not be perpetuated in 
the LTCH PPS rates for future years (August 30, 2002; 67 FR 56027 
through 56037). The purpose of this one-time adjustment is to ensure 
that total estimated payments under the LTCH PPS in FY 2003 were 
``budget neutral'' to what total estimated payments would have been if 
the LTCH PPS were not implemented in FY 2003 by correcting for possible 
significant errors in the calculation of the LTCH PPS FY 2003 standard 
Federal rate. However, as we discuss in greater detail above in section 
IV.C.3. of this preamble, the proposed adjustment to the LTCH PPS 
market basket to account for changes in coding practices for the 
determination of the Federal rate for RY 2007 update is a separate 
adjustment to the Federal rate. While the one-time adjustment would 
ensure that any errors in past estimates would not be perpetuated in 
the LTCH PPS rates for future years, the proposed adjustment to account 
for coding practices in the proposed update to the Federal rate for RY 
2007 is intended to adjust the Federal rate for increased payments made 
in FY 2004 that resulted from an increase in CMI due to improved 
documentation and coding rather than an increase in patient severity. 
Therefore, because the intended purposes of the adjustments are 
different, as explained above, we do not believe that we are acting in 
an inconsistent manner by making two separate adjustments under the 
LTCH PPS (one adjustment to account for changes in coding practices in 
determining the RY 2007 Federal rate and the other under Sec.  
412.523(d)(3) to ensure budget neutrality in the first year of the LTCH 
PPS (FY 2003)). We also note that, although we made a ``one-time'' 
adjustment under the IRF PPS to account for the effect of coding or 
classification changes that do not reflect real changes in case mix 
that resulted in increased Medicare payments to IRFs for the time 
period between 1999 and 2002, the statute does not preclude CMS from 
making additional adjustments under the IRF PPS in the future based on 
evidence of coding or classification changes that do not reflect real 
changes in case mix, to the extent that such changes affect aggregate 
IRF PPS payments.
    In addition, we do not believe that the adjustment to the market 
basket estimate to account for changes in coding practices in 
determining the update to the LTCH PPS Federal rate for RY 2007 
necessarily replaces the need for a possible one-time budget neutrality 
adjustment. However, as we noted in the RY 2007 LTCH PPS proposed rule 
and as we reiterated above, the zero percent update to the Federal rate 
for the 2007 LTCH PPS rate year may make the one-time prospective 
adjustment to the LTCH PPS Federal rate provided for under Sec.  
412.523(d)(3) unnecessary. Specifically, to the extent our review of FY 
2003 data (which will include, but is not limited to changes in case-
mix) shows that, if by coincidence after updating the Federal rate by 
zero percent in RY 2007, the Federal rate is appropriate, it is 
possible that any further adjustment to the Federal rate may be 
unnecessary. Furthermore, as discussed in greater detail below, since 
the intended purpose of the one-time adjustment at Sec.  412.523(d)(3) 
is to ensure that total estimated payments under the LTCH PPS in FY 
2003 were ``budget neutral'' to what total estimated payments would 
have been if the LTCH

[[Page 27844]]

PPS were not implemented in FY 2003, we believe it is incumbent upon us 
to extend the deadline for this adjustment to ensure that we are in 
possession of the most reliable cost report data indicating the actual 
LTCH costs during FY 2003. Therefore, as discussed above, because the 
intended purposes of the adjustment to the market basket to account for 
changes in coding practices in determining the RY 2007 Federal rate and 
the possible ``one-time'' adjustment under Sec.  421.523(d)(3) are 
different, we disagree with the commenter that LTCHs will be penalized 
twice by establishing a zero percent update for RY 2007 and extending 
the deadline for determining the possible ``one-time'' adjustment under 
Sec.  412.523(d)(3).
    We also disagree with the commenters' contention that our proposal 
to extend the deadline for the possible one-time budget neutrality 
adjustment would constitute ``an abuse of its statutory authority.'' 
Rather, as we stated in the RY 2007 LTCH PPS proposed rule (71 FR 
4681)), section 123(a)(1) of the BBRA, required that the system 
``maintain budget neutrality'' for FY 2003. Moreover, section 123(a)(1) 
of the BBRA as amended by section 307(b)(1) of the BIPA confers broad 
authority on the Secretary to make appropriate adjustments under the 
LTCH PPS. Consequently, we believe we would be fulfilling our statutory 
mandate to ensure that FY 2003 payments under the LTCH PPS are in fact 
budget neutral. Under budget neutrality, estimated aggregate payments 
under the LTCH prospective payment system would equal the estimated 
aggregate payments that would be made if the LTCH PPS would not be 
implemented for FY 2003. The methodology for determining the LTCH PPS 
standard Federal rate for FY 2003 that would ``maintain budget 
neutrality'' is described in considerable detail in the August 30, 2002 
final rule (67 FR 56027 through 56037). As we discussed in that same 
final rule, our methodology for estimating payments for the purposes of 
budget neutrality calculations used the best available data and 
necessarily reflects assumptions in estimating aggregate payments that 
would be made if the LTCH PPS was not implemented. We also stated our 
intentions to monitor LTCH PPS payment data to evaluate the ultimate 
accuracy of the assumptions used in the budget neutrality calculations 
(for example, inflation factors, intensity of services provided, or 
behavioral response to the implementation of the LTCH PPS). To the 
extent that those assumptions significantly differ from actual 
experience, the aggregate amount of actual payments during FY 2003 may 
actually be significantly higher or lower than the estimates upon which 
the budget neutrality calculations were based. Therefore, in 
implementing the LTCH PPS, the Secretary exercised his broad authority 
in establishing the LTCH PPS and provided for the possibility of a one-
time prospective adjustment to the LTCH PPS rates at Sec.  
412.523(d)(3). The purpose of that provision was to prevent any 
significant difference between actual payments and estimated payments 
for the first year of the LTCH PPS, when we established the budget 
neutral Federal rate, as required by the statute (discussed 
previously), from being perpetuated in the PPS rates for future years.
    It is accurate that currently the most recent complete year of LTCH 
cost report data is FY 2003 (the data which is needed to determine if 
the possible one-time budget neutrality adjustment is necessary). 
However, the vast majority of the FY 2003 LTCH cost report data is 
currently only ``as submitted'' by the LTCH and has not yet been 
reviewed before being settled (or audited) by the FI. LTCH cost report 
data from FY 2004 is also currently available; however, it is only 
partially complete (that is, not all LTCHs' FY 2004 cost reports are 
available). As we explained in the RY 2007 LTCH PPS proposed rule (71 
FR 4684), because of the lag time typically involved in the entire cost 
report settlement process, currently we are not able to utilize the 
most accurate and complete data reflecting the actual costs incurred by 
LTCHs for cost reporting periods beginning during FY 2003 because the 
majority of LTCHs' FY 2003 cost reports are not as yet settled. 
Specifically, as noted in the RY 2007 LTCH PPS proposed rule, there are 
many LTCHs with cost reporting periods from September 1 through August 
30, which first became subject to the LTCH PPS on September 1, 2003. 
Given the lag time required for typical cost report settlement 
involving submission, desk review, and in some cases an audit, which 
can take approximately 2 additional years to complete (and we expect to 
audit a number of LTCH cost reports for the purpose of this analysis), 
we do not believe that the October 1, 2006 deadline established at 
Sec.  412.523(d)(3) is any longer reasonable or realistic. In fact, we 
believe that it would be inappropriate to develop and propose such an 
adjustment that would be effective by October 1, 2006, as required by 
the current regulations, to the Federal rate under Sec.  412.523(d)(3) 
when we do not believe that we are in possession of the most reliable 
cost report data indicating the actual costs of LTCHs during the year 
in which we established the LTCH PPS (FY 2003). As we explained in the 
RY 2007 LTCH PPS proposed rule (71 FR 4684), we believe that we will be 
in possession of the most reliable FY 2003 cost report data reflecting 
the actual costs of LTCHs during the year in which we established the 
standard Federal payment rate for LTCHs with an August 2004 fiscal year 
ending date by July 2007. Therefore, any proposed adjustment could then 
be proposed, and if ultimately finalized, implemented on July 1, 2008. 
Furthermore, we believe that having additional years of data that were 
generated under the LTCH PPS (such as FY 2004 LTCH cost report data, 
and possibly partially complete FY 2005 LTCH cost report data) may be 
useful in assisting us in evaluating the settled and audited FY 2003 
LTCH cost report data. Subsequent years data may be helpful in 
determining if the possible one-time budget neutrality adjustment under 
Sec.  412.523(d)(3) is necessary, as it may help us to identify 
aberrant or erroneous FY 2003 data.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4685), we emphasized 
the distinction between the sufficiency of the data utilized for the 
analysis that supported the proposed update to the Federal rate for RY 
2007 and the proposal to postpone the possible one-time prospective 
adjustment to the Federal rate at Sec.  412.523(d)(3). Specifically, 
the RY 2007 update to the Federal rate is based on the best data from 
FY 2004, including case-mix data, which is derived from the MedPAR 
files, and data analysis coordinated by OACT, ORDI, and assisted by 3M. 
The LTCH claims data used to make this case-mix adjustment are current 
and accurate and are not dependent upon the cost report settlement 
process. However, the data review that we believe necessary for the 
comprehensive analysis of the accuracy of the Federal payment rate 
under Sec.  412.523(d)(3), which would be applied prospectively (and 
therefore has the potential to affect all future LTCH PPS Federal 
rates), is dependent on settled Medicare cost report data that we 
expect will be available by July 2007. We believe that only through a 
thorough analysis of the most comprehensive and accurate data from the 
first year of the implementation of the LTCH PPS for FY 2003 (including 
settled and fully audited cost reports) will we be able to reliably 
determine whether a one-time prospective adjustment to the Federal

[[Page 27845]]

rate should be proposed. Therefore, we believe that postponing the 
deadline for this possible one-time prospective adjustment until July 
1, 2008 will allow us to have the best available data from the first 
year of the LTCH PPS (FY 2003) upon which to base such an adjustment.
    We disagree with the commenters that suggest that the transition 
period budget neutrality adjustment should make it unnecessary to 
postpone the deadline for making the possible one-time budget 
neutrality adjustment under Sec.  412.523(d)(3). As discussed above in 
section V.D.5. of this preamble, during each year of the 5-year 
transition period, we reduce all LTCH Medicare payments (whether an 
LTCH elects payment based on 100 percent of the Federal rate or whether 
an LTCH is being paid under the transition blend methodology) to 
account for the cost of the applicable transition period methodology in 
a given LTCH PPS rate year. We established this adjustment because the 
standard Federal rate was determined as if all LTCHs would be paid 
based on 100 percent of the standard Federal rate. However, since we 
provided for a 5-year transition period that allows LTCHs to choose to 
receive blended payments based partially on the reasonable cost-based 
methodology, it was necessary to make a budget neutrality adjustment 
that accounts for the additional costs to the Medicare program that 
result from the increased payments to LTCHs that choose to receive 
blended payments. As reiterated above, we separately provided for the 
possibility of making a one-time prospective adjustment to the LTCH PPS 
rates at Sec.  412.523(d)(3) so that the effect of any significant 
difference between actual payments and estimated payments for the first 
year of the LTCH PPS would not be perpetuated in the LTCH PPS rates for 
future years. Therefore, as explained above, because the intended 
purposes of the adjustments are vastly different, we do not believe 
that the transition period budget neutrality adjustment can replace the 
need for a possible one-time budget neutrality adjustment.
    To summarize, we believe that postponing the deadline for this 
possible one-time prospective adjustment until July 1, 2008 will allow 
us to have the best available data from the first year of the LTCH PPS 
(FY 2003) upon which to base an adjustment. Therefore, in this final 
rule, we are postponing the deadline for the possible one-time budget 
neutrality adjustment under Sec.  412.523(d)(3). Accordingly, in this 
final rule, under broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of the BIPA to 
include appropriate adjustments in the development of the LTCH PPS, we 
are revising Sec.  412.523(d)(3) to specify that the Secretary will 
review payments under the LTCH PPS and may make a one-time prospective 
adjustment to the LTCH PPS rate on or before July 1, 2008, so that the 
effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH PPS is not 
perpetuated in the LTCH PPS rates for future years. Finally, as we 
discussed in the RY 2007 LTCH PPS proposed rule and as stated above in 
section IV.D.4. of this preamble, we note that we intend to revisit our 
earlier determinations as to the appropriateness of other payment 
adjustments (for example, DSH, or IME) at the same time that we would 
establish the possible one-time prospective adjustment by July 1, 2008.

VI. Other Policy Changes for the 2007 LTCH PPS Rate Year

A. Adjustments for Special Cases

1. Adjustment for Short-Stay Outlier (SSO) Cases
a. Changes to the Method for Determining the Payment Amount for SSO 
Cases
    In the August 30, 2002 rule for the LTCH PPS, under Sec.  412.529, 
we established a special payment policy for SSO cases, that is cases 
with a LOS of less than or equal to five-sixths of the geometric ALOS 
for each LTC-DRG. When we established the SSO policy, we explained that 
``[a] short-stay outlier case may occur when a beneficiary receives 
less than the full course of treatment at the LTCH before being 
discharged. These patients may be discharged to another site of care or 
they may be discharged and not readmitted because they no longer 
require treatment. Furthermore, patients may expire early in their LTCH 
stay'' (67 FR 55995). Also in the August 30, 2002 final rule, we stated 
that when we first described the policy, in the March 27, 2002 proposed 
rule, ``* * * we based the proposed policy on the belief that many of 
these patients could have been treated more appropriately in an acute 
hospital subject to the acute care hospital inpatient prospective 
payment system'' (67 FR 55995). Therefore, under the LTCH PPS, we 
implemented a special payment adjustment for SSO cases. Under the 
existing SSO policy at Sec.  412.529, for LTCH PPS discharges with a 
LOS of up to and including five-sixths (\5/6\) of the geometric ALOS 
for the LTC-DRG, in general, we adjust the per discharge payment under 
the LTCH PPS by the lesser of 120 percent of the estimated cost of the 
case, 120 percent of the LTC-DRG specific per diem amount multiplied by 
the LOS of that discharge, or the full LTC-DRG payment.
    As noted previously, generally LTCHs are defined by statute as 
having an ALOS of greater than 25 days. We stated that we believe that 
the SSO payment adjustment results in more appropriate payments, since 
these cases most likely would not receive a full course of an LTCH-
level of treatment in such a short period of time and the full LTC-DRG 
payment may not always be appropriate. Payment-to-cost ratios simulated 
for LTCHs, for the cases described above, indicated that if LTCHs 
received a full LTC-DRG payment for those cases, they would be 
significantly ``overpaid'' for the resources they have actually 
expended in treating those patients.
    In establishing the SSO policy, we also believed that providing a 
reduced payment for SSO cases would discourage hospitals from admitting 
patients for whom they would not provide complete treatment to maximize 
Medicare payments. We also believed that the policy did not severely 
penalize providers that, in good faith, had admitted a patient and 
provided some services before realizing that the beneficiary could 
receive more appropriate treatment at another site of care. As we 
explained in the FY 2003 LTCH PPS final rule, establishing an SSO 
payment for these types of cases addressed the incentives inherent in a 
discharge-based prospective payment system for LTCHs for treating 
patients with a short LOS (67 FR 55995 through 56000).
    When we established the SSO adjustment at the outset of the LTCH 
PPS, we noted in the August 30, 2002 final rule that the regression 
analyses and simulations based on prior years' LTCH claims data 
generated under the former reasonable cost-based (TEFRA) system, upon 
which we based many of our policy determinations regarding the design 
of the LTCH PPS for FY 2003, indicated that nearly half of LTCH cases 
would be paid on an adjusted per discharge amount based on the SSO 
payment policy established at Sec.  412.529 once the LTCH PPS was 
implemented. However, as we stated in that rule, we believe that ``* * 
* this data analysis does not necessarily predict the future behavior 
of LTCHs operating under a prospective payment system. The data used in 
the analysis are a product or reflection of the practice patterns of 
hospitals that operate under the mechanisms of the TEFRA payment 
system, which are different from the principles of a prospective 
payment

[[Page 27846]]

system. However, these are the best data available upon which we can 
simulate LTCH behavior under the new LTCH prospective payment system. 
We believe that once the LTCH prospective payment system is 
implemented, the practice patterns of LTCHs will change. We anticipate 
that hospitals will alter their admission, treatment, and discharge 
patterns. Thus, we fully expect that an increasing majority of cases 
will be reimbursed on an unadjusted per discharge basis during the 
transition from reasonable cost-based reimbursement to prospective 
payments'' (67 FR 55999).
    As we noted in the August 30, 2003 final rule, ``* * *[B]ased on 
our experience in implementing other Medicare prospective payment 
systems, we fully expect that as new data are received, we may revisit 
policy decisions described in this final rule. Furthermore, our Office 
of Research, Development, and Information (ORDI)] will be tracking the 
impact of the prospective payments on LTCHs, other hospitals that treat 
long-term care patients, and other post-acute care providers, which 
will enable us to determine whether additional policy changes are 
warranted'' (67 FR 55999).
    A change in the SSO policy was published in the RY 2004 LTCH PPS 
final rule (68 FR 34148), following a reexamination of the impact of 
the SSO policy on subclause (II) LTCHs authorized by section 
1886(d)(1)(B)(iv)(II) of the Act which we implemented at Sec.  
412.23(e)(2)(ii). At that time, we revised certain aspects of the SSO 
policy to meet the specific needs of this type of LTCH. This provision 
provided an exception to the general definition of an LTCH set forth in 
section 1886(d)(1)(B)(iv)(I) of the Act, implemented at Sec.  
412.23(e)(2)(i), specifying that to qualify as an LTCH, a hospital must 
have first been excluded as an LTCH in calendar year (CY) 1986, have an 
inpatient ALOS of greater than 20 days, and demonstrate that 80 percent 
or more of its annual Medicare inpatient discharges in the 12-month 
cost reporting period ending in FY 1997 have a principal diagnosis that 
reflects a finding of neoplastic disease (62 FR 46016 and 46026). In 
the RY 2004 final rule, we particularly noted that the Congress 
recognized the existence and importance of a distinct category of LTCHs 
that might not otherwise warrant exclusion from the acute care 
inpatient PPS under subclause (I) but which nonetheless fulfilled a 
unique and vital role in serving a particular subset of Medicare 
patients. Consistent with existing policies that differentiated 
subclause (II) LTCHs from other LTCHs, we determined that it was 
reasonable for us to consider whether or not a policy that was designed 
for LTCHs designated under subclause (I) could reasonably and equitably 
be applied to a subclause (II) LTCH without some measure of adjustment. 
Therefore, in the RY 2004 LTCH PPS final rule, we provided an 
additional adjustment to the SSO policy for subclause (II) LTCHs. 
Specifically, in the RY 2004 LTCH PPS final rule (68 FR 34147 through 
34148), we made a temporary adjustment to the applicable percentages 
used in the SSO payment formula at Sec.  412.529(c) (applied to the 
cost of the SSO case or the per diem LTC-DRG payment) used to calculate 
Medicare payments under the SSO policy. Specifically, at existing Sec.  
412.529(c)(4) for LTCHs designated under section 1886(d)(1)(B)(iv)(II) 
of the Act and Sec.  412.23(e)(2)(ii), we established a temporary 
adjustment that will sunset upon such hospitals' first cost reporting 
period beginning on or after October 1, 2006. Under existing policy, 
Medicare payment to a subclause (I) LTCH for SSOs is the least of the 
following: 120 percent of the LTC-DRG per diem amount multiplied by the 
LOS of the discharge; 120 percent of the estimated cost of the case; or 
the full LTC-DRG. Under this temporary adjustment at Sec.  
412.529(c)(4) for a subclause (II) LTCH, we substitute the following 
percentages for the 120 percent figure used for subclause (I) hospitals 
in the SSO payment formula at Sec.  412.529(c). For discharges, 
occurring on or after July 1, 2003, for cost reporting periods 
beginning during the first year of the 5-year LTCH PPS transition 
period for subclause (II) LTCHs, the SSO percentage is 195 percent. For 
discharges occurring in the cost reporting periods beginning during the 
second year of the transition period, the applicable SSO percentage is 
193 percent; for discharges occurring in cost reporting periods 
beginning during the third year of the transition period, the 
applicable percentage is 165 percent; for discharges occurring in the 
cost reporting period beginning during the fourth year of the 
transition, the percentage is 136 percent; and for discharges occurring 
in cost reporting periods beginning during the fifth year of the 5-year 
transition (and for discharges occurring in all future cost reporting 
periods), the SSO percentage for ``subclause (II)'' LTCHs would also be 
120 percent, that is, the same as it is currently for all other LTCHs 
under the LTCH PPS.
    As we continue to monitor the SSO policy, as we discussed in the RY 
2007 LTCH PPS proposed rule (71 FR 4636), an analysis of LTCH claims 
data from the FY 2004 MedPAR files (using version 23.0 of the GROUPER), 
reveals that approximately 37 percent of LTCH discharges continue to be 
paid under the provisions of the existing SSO policy at Sec.  412.529. 
As noted previously, at the outset of the LTCH PPS, the data upon which 
we based our system indicated that 48.4 percent of patients admitted to 
LTCHs fell into the category of SSOs, a percentage that we believed to 
be inappropriately high, given that the LTCHs are excluded by statute 
from the IPPS since it is understood that LTCHs are established to care 
for patients requiring long-term hospital-level care. We believed our 
existing policy accounted for the fact that an LTCH in good faith could 
admit a patient and provide some services before realizing that the 
beneficiary would receive more appropriate treatment at another site of 
care. But in establishing the SSO policy, which provided a reduced 
payment for cases with a LOS that is up to and including five-sixths of 
the geometric ALOS for the LTC-DRG, it was our intent to not encourage 
hospitals to admit patients for whom a long-term hospital stay was not 
appropriate. We were concerned that these inappropriate admissions 
could be made to maximize payment (67 FR 55995). As noted previously, 
when this policy was established, at the start of the LTCH PPS for cost 
reporting periods beginning on or after October 1, 2002, nearly one-
half (48.4 percent) of all LTCH cases would have been paid as SSOs. 
However, we believed that the percentage of SSOs would drop 
significantly from 48.4 percent once the LTCH PPS was implemented. As 
we stated in the RY 2007 LTCH PPS proposed rule, we expressed our 
concern that the existing SSO payment adjustment at Sec.  412.529, 
which generally will pay a per discharge amount based upon the lesser 
of 120 percent of the specific LTC-DRG per diem amount (multiplied by 
the LOS); 120 percent of the estimated costs of the case; or the full 
LTC-DRG payment as specified in existing Sec.  412.529(c)(1), may 
unintentionally have provided a financial incentive for LTCHs to admit 
patients more appropriately treated in other settings.
    In the August 30, 2002 final rule, when we first presented our 
rationale for establishing the SSO policy, we noted that since LTCHs 
are defined by statute as generally having an ALOS greater than 25 
days, we had proposed payment adjustments to make appropriate payment 
for cases that may have been transferred from an acute

[[Page 27847]]

hospital prematurely'' (67 FR 55999). We continue to have these 
concerns, and we believe that our data indicate that after more than 3 
years of the LTCH PPS, a policy reexamination is both necessary and 
appropriate when so many SSO cases have short lengths of stay. In fact, 
a large percentage of SSOs have a LOS of 14 days or less. To address 
these concerns, in the RY 2007 LTCH PPS proposed rule, consistent with 
the Secretary's broad authority ``to provide for appropriate 
adjustments to the long-term hospital payment system * * *'' 
established under section 123 of the BBRA as amended by section 
307(b)(1) of BIPA, we proposed to reduce the current adjustment at 
existing Sec.  412.529(c)(1)(ii), which is based on 120 percent of the 
estimated costs of the case, to 100 percent of the estimated costs of 
the case for discharges occurring on or after July 1, 2006. We believe 
that by reducing the Medicare payment to the LTCH for a specific SSO 
case so that it would not exceed the estimated costs incurred for that 
case, we would be removing what we believe could be a financial 
incentive that the current policy has established to treat short stay 
cases in LTCHs. We are not changing the payment option of 120 percent 
of the per diem for a specific LTC-DRG multiplied by the LOS for that 
case because of the specific calculations upon which we based this 
aspect of the SSO policy adjustment. As described in detail in the FY 
2003 final rule LTCH PPS, when we first established the SSO policy, we 
found that five-sixths of the geometric ALOS would be the SSO threshold 
where the full LTC-DRG payment would be made at 120 percent. That is, 
by adjusting the per discharge payment by paying at 120 percent of the 
per diem LTC-DRG payment, once a stay reaches five-sixths of the 
geometric ALOS for the LTC-DRG, the full LTC-DRG payment will have been 
made. We continue to believe that this specific methodology, which 
results in a gradual increase in payment as the LOS increases without 
producing a payment ``cliff'' at any one point, provides a reasonable 
payment option under the SSO policy. (67 FR 55997, August 30, 2002)
    As discussed in the RY 2007 LTCH PPS proposed rule, we believe that 
this proposed revision to the SSO payment methodology reducing the 120 
percent of cost option to 100 percent of costs would further discourage 
inappropriate admissions of these patients to LTCHs because we will be 
removing the financial incentive to admit cases that do not typically 
belong in LTCHs but would be more appropriately treated in another 
setting (for example, an inpatient acute care hospital). Further, since 
the vast majority of LTCH patients are admitted directly from IPPS 
acute-care hospitals, a fact verified by our patient data files 
(National Claims History Files), a recent MedPAC Report (June 2003, p. 
79), and by research done by the Urban Institute at the outset of the 
LTCH PPS and by RTI, as we discussed in the RY 2007 LTCH PPS proposed 
rule, we believe that the admission of short-stay patients at LTCHs may 
indicate premature and even inappropriate discharges from the referring 
acute care hospitals. For example, if an acute care hospital patient 
required additional inpatient services, it would usually be most 
appropriate for the acute care hospital to continue to treat the 
patient rather than discharging and admitting the patient to a LTCH for 
a short-stay episode.
    To remove what may be an inappropriate financial incentive for a 
LTCH to admit a short-stay case, as well as, to discourage LTCHs from 
behaving like acute care hospitals by having a significant number of 
cases with lengths of stay more typical of acute care hospitals and 
also to discourage LTCHs from admitting patients that could be 
premature discharges from acute care hospitals, in the RY 2007 LTCH PPS 
proposed rule, we also proposed to add a fourth payment method to the 
three alternatives under Sec.  412.529(c) for SSO cases. Specifically, 
we proposed to revise Sec.  412.529 to provide that for discharges from 
LTCHs described in Sec.  412.23(e)(2)(i) occurring on or after July 1, 
2006, payment for a SSO case would be the least of the following: 120 
percent of the per diem amount for a specific LTC-DRG multiplied by the 
LOS of the discharge; 100 percent of the estimated costs of the case 
(which we proposed to change from the existing 120 percent of estimated 
costs); the full LTCH PPS payment for the LTC-DRG; or a payment amount 
under the LTCH PPS that is comparable to the payment that would 
otherwise be paid under the IPPS.
    We explained that this additional component to the SSO payment 
formula would be particularly appropriate because it reflects our 
concern that generally, LTCHs that admit SSO patients with lengths of 
stay more typical of an acute care hospital may be, in fact, behaving 
like acute care hospitals. Therefore, we proposed to include an 
alternative payment method under the LTCH PPS SSO adjustment that could 
result in a LTCH PPS payment to the LTCH for a SSO stay that would be 
comparable to what Medicare would pay to an acute care hospital for the 
same DRG. Furthermore, since over 80 percent of all LTCH patients (FY 
2003 MedPAR) are admitted from acute care hospitals to LTCHs, of which 
many become SSOs, an acute care hospital's discharge of a patient who 
is still in need of acute-level care may indicate a premature and 
inappropriate discharge from the acute care hospital and an 
inappropriate admission to the LTCH, which would result in a second, 
Medicare payment for the case of the patient to the LTCH for what is 
actually one episode of care. We established a similar payment 
adjustment under the LTCH PPS at Sec.  412.534 for a LTCH HwH or LTCH 
satellite for which greater than 25 percent (or the appropriate 
specified percentage) of its patients were admitted from a host 
hospital in the FY 2005 IPPS final rule (69 FR 49191 through 49214). 
Under that policy, unless the patient reached high cost outlier (HCO) 
status at the acute care hospital prior to discharge, Medicare payments 
to the LTCH HwH or satellite for those cases in excess of the 
applicable threshold are based upon the lesser of a payment otherwise 
payable under the LTCH PPS or a LTCH PPS amount equivalent to what 
would have been paid for such a discharge under the IPPS. This payment 
adjustment reflected our belief that if patient-shifting between a host 
hospital and its co-located LTCH exceeded a specific threshold, the 
onsite LTCH was functioning as a de facto unit of the acute care 
hospital, a configuration not permitted by section 1886(d)(1)(B) of the 
Act, which authorizes rehabilitation and psychiatric units but not LTCH 
units of acute care hospitals. We reasoned that if the patient was in 
effect, being treated in a ``unit'' of the acute care hospital, it was 
reasonable to revise the payment methodology and take this into 
account. For LTCH HwH or satellite discharges in excess of the 25 
percent (or appropriate percentage) threshold, therefore, as specified 
in Sec.  412.534, Medicare will make a payment based upon the lesser of 
the LTCH PPS payment otherwise payable under subpart O and an amount 
under this subpart that is equivalent to an amount that would be paid 
under the IPPS.
    As we discussed in the RY 2007 LTCH PPS proposed rule, we believe 
that adapting the underlying premise of the payment adjustment at Sec.  
412.534 to a new payment adjustment method under the SSO policy would 
be particularly appropriate, since we were concerned (and our data 
seemed to confirm) that LTCHs may be admitting patients that would 
otherwise be treated in acute care hospitals, as evidenced by lengths 
of stay at LTCHs more in

[[Page 27848]]

keeping with an acute care hospital stay, than the considerably longer 
lengths of stay characteristic of LTCHs. We believed that under this 
proposed additional payment method under the LTCH PPS for SSO patients, 
the LTCH could receive a Medicare LTCH PPS payment comparable to that 
which would be paid under the IPPS.
    As we also discussed in the RY 2007 LTCH PPS proposed rule, we are 
very concerned that acute care hospitals may be shifting some of their 
potentially longer stay patients to LTCHs, resulting in a high 
incidence of SSOs at LTCHs. This pattern may indicate a premature 
discharge from the acute care hospital (where less than a full course 
of treatment was delivered) and an unnecessary admission to the LTCH. 
The payment adjustment at Sec.  412.534, based on the 25 percent (or 
applicable percentage) threshold, focused on inappropriate patient 
movement between co-located providers. However, we do not believe that 
co-location is a prerequisite to inappropriate patient-shifting between 
an acute care hospital and a LTCH.
    As indicated previously, section 123 of the BBRA, as amended by 
section 307(b)(1) of the BIPA confers broad discretionary authority on 
the Secretary to implement a prospective payment system for LTCHs, 
including providing for appropriate adjustments to the payment system. 
This broad authority gives the Secretary great flexibility to fashion a 
LTCH PPS based on both original policies as well as concepts borrowed 
from other payments systems that are adapted, where appropriate, to the 
LTCH context. In the instant case, our finalized SSO policy utilizes, 
in large part, principles from the IPPS payment methodology and builds 
upon those concepts to create a LTCH PPS payment adjustment that 
results in an appropriate payment for those inpatient stays that we 
believe are not characteristic of LTCHs but could be more appropriately 
treated in another setting.
    Consequently, in the discussion that follows, as we explained in 
the RY 2007 LTCH PPS proposed rule, for the sake of clarity, we use 
phrases such as ``IPPS DRG relative weights,'' and the ``IPPS labor-
related share,'' in describing features of the IPPS that we would use 
in calculating LTCH PPS payments under this new alternative adjustment. 
We want to emphasize, however, that such a payment would not be an IPPS 
payment but rather, a payment under the LTCH PPS that is generally 
comparable to a payment under the IPPS payment methodology. Therefore, 
for Medicare payments for SSO cases under the LTCH PPS we proposed to 
add a fourth option that would be ``an amount under subpart O that is 
comparable to an amount that otherwise would be paid under the IPPS'' 
that would be calculated based on the sum of the applicable operating 
and capital IPPS rates in effect at the time of the discharge from the 
LTCH, as established in the applicable IPPS final rule published 
annually in the Federal Register. This would be necessary since, under 
the IPPS, there are separate Medicare rates for operating (subpart D of 
part 412) and capital (subpart M of part 412) costs to acute care 
hospitals; while, under the LTCH PPS, there is a single payment for the 
operating and capital costs of the inpatient hospital services provided 
to LTCH Medicare patients. We also proposed to add that ``an amount 
under subpart O that is comparable to an amount that otherwise would be 
paid under the IPPS'' would be calculated including the applicable 
differences in resource use (that is, IPPS DRG relative weights), 
differences in area wage levels (that is, wage index), a COLA for 
hospitals located in Alaska and Hawaii, the treatment of a 
disproportionate share of low income patients (DSH), if applicable, and 
an adjustment for indirect medical education (IME), if applicable. (We 
would emphasize that, under this proposed policy, Medicare payments, 
payable under subpart O, would be ``comparable'' to what would 
otherwise be paid under the IPPS, rather than ``equal'' to an IPPS 
payment because, as we explained, there are specific features of the 
IPPS that do not directly translate into the LTCH PPS, so there would 
be no way to assure that LTCH payments are ``equal'' to an amount that 
would be paid under the IPPS. In using the word ``comparable,'' to 
describe this payment alternative to the existing SSO policy, we 
intended to make clear that such payments would be calculated by 
applying IPPS principles to achieve a close approximation of payments 
that would be made under the IPPS, recognizing the fact that not all 
components of the IPPS can be carried out precisely in the LTCH PPS 
context.)
    Specifically, in the RY 2007 LTCH PPS proposed rule, we proposed 
that we would calculate an amount payable under subpart O comparable to 
what would otherwise be paid under the IPPS for the costs of inpatient 
operating services which would be based on the standardized amount 
determined under Sec.  412.64(c), adjusted by the applicable DRG 
weighting factors determined under Sec.  412.60. This amount would be 
further adjusted to account for different area wage levels by 
geographic area using the applicable IPPS labor-related share, based on 
the CBSA where the LTCH is physically located as set forth at Sec.  
412.525(c) and using the IPPS wage index for non-reclassified hospitals 
published in the annual IPPS final rule. (In the RY 2006 LTCH PPS final 
rule (70 FR 24200), we discuss the inapplicability of geographic 
reclassification procedures for LTCHs.) For LTCHs located in Alaska and 
Hawaii, this amount would also be adjusted by the applicable proposed 
COLA factor used under the IPPS published annually in the IPPS final 
rule. (Currently these same COLA factors are used under both the IPPS 
and the LTCH PPS.)
    Additionally, this SSO proposed revised payment adjustment 
alternative (that is, an amount comparable to what would be paid under 
the IPPS for the case) could also include a DSH adjustment (see Sec.  
412.106), if applicable. Under the proposed revision to the LTCH PPS 
SSO payment adjustment in the case of a LTCH that is a teaching 
hospital, we explained that we would determine the IME payment 
adjustment for the LTCH by imputing a limit on the number of full-time 
equivalent (FTE) residents that may be counted for IME (IME cap) based 
on the LTCH's direct GME cap as set forth at Sec.  413.79(c)(2) (which 
would already have been established for a LTCH which had residency 
programs). Thus, we proposed calculating an IME payment for the LTCH 
that is comparable to the IPPS payment formula set forth at Sec.  
412.105. Under the IPPS IME payment regulations at Sec.  412.105 limits 
were established on the number of FTE residents a hospital is permitted 
to count for IME payments based on the number of residents reported by 
the hospital 1996 cost report. The use of a proxy for the IME cap would 
be necessary because it would not be appropriate to apply the IPPS IME 
rules literally in the context of this LTCH PPS payment adjustment.
    Thus, we proposed calculating an IME payment for a LTCH that is a 
teaching hospital that is comparable to the IPPS payment formula set 
forth at Sec.  412.105. The use of a proxy for the IME cap would be 
necessary because it would not be appropriate to apply the IPPS IME 
rules literally in the context of this LTCH PPS payment adjustment. 
This IME FTE resident cap under the IPPS would not translate 
appropriately to a LTCH. Since a LTCH was not paid IME in 1996 it would 
not have reported any FTE residents for IME purposes on its 1996 cost 
report. Therefore, we proposed using the LTCH's direct GME

[[Page 27849]]

resident cap for the purpose of calculating the proposed payment 
adjustment alternative for SSOs. We believed this proposal was 
reasonable since it would cap the number of FTE residents that could be 
counted for IME payment purposes of calculating a comparable IME 
payment based on the best available data on residency programs at LTCHs 
(which could be computed from direct GME data for LTCHs that had 
residency programs). Using an imputed IME FTE resident cap based on GME 
data would enable us to factor an adjustment for indirect costs of 
residency programs into a Medicare payment under the LTCH PPS for those 
SSO cases where the least of the payment alternatives is an amount 
under the LTCH PPS comparable to what would be paid under the IPPS. 
Both a DSH adjustment and an IME adjustment, as necessary, could be 
computed from data already collected on the LTCH's cost report.
    Therefore, we proposed to refer to the LTCH's direct GME resident 
cap for the purpose of calculating the proposed payment adjustment 
alternative for SSOs. We believed this proposal was reasonable since it 
would cap the number of FTE residents that could be counted for 
purposes of calculating a comparable IME payment based on the best 
available data on residency programs at LTCHs (which could be computed 
from direct GME data for LTCHs that had residency programs).
    As we discussed in the RY 2007 LTCH PPS proposed rule, under this 
proposed LTCH PPS payment adjustment, an amount payable under subpart O 
comparable to what would be paid under the IPPS would also include 
payment for inpatient capital-related costs, based on the proposed 
revision to the LTCH PPS SSO payment adjustment. In the case of a LTCH 
that is a teaching hospital, we explained that we would determine the 
comparable IME payment adjustment for the LTCH by imputing a limit on 
the number of full-time equivalent (FTE) residents that may be counted 
for IME (IME cap) based on the LTCH's direct GME cap as set forth at 
Sec.  413.79(c)(2) (which would already have been established for a 
LTCH which had residency programs) and the capital Federal rate at 
Sec.  412.308(c), which would be adjusted by the applicable IPPS DRG 
weighting factors at Sec.  412.60, as set forth at Sec.  412.312(b). We 
proposed that this amount would be further adjusted by the applicable 
geographic adjustment factors set forth at Sec.  412.316, including 
wage index (based on the CBSA where a LTCH is physically located and 
derived from the IPPS wage index for non-reclassified hospitals as 
published in the annual IPPS final rule), and large urban location, if 
applicable.
    We note that we proposed that ``a LTCH PPS payment amount 
comparable to what would be paid under the IPPS'' would not include 
additional payments for extraordinarily high cost cases under the IPPS 
outlier policy (Sec.  412.80(a)(3)). Under existing LTCH PPS policy, a 
SSO case that meets the criteria for a LTCH PPS HCO payment at Sec.  
412.525(a)(1) (that is, if the estimated costs of the case exceed the 
adjusted LTC-DRG SSO payment plus the fixed loss amount) would receive 
an additional payment under the LTCH PPS HCO policy at Sec.  412.525(a) 
(67 FR 56026, August 30, 2002). For purposes of HCOs under the proposed 
SSO policy, we would continue to use a fixed-loss amount calculated 
under Sec.  412.525(a), and not a fixed-loss amount based on Sec.  
412.80(a). Medicare would pay the LTCH 80 percent of the costs of the 
case that exceed the sum of the applicable option of the least of the 
four proposed payment options, described above, and the fixed-loss 
amount determined under Sec.  412.525(a). As we discussed in the RY 
2007 LTCH PPS proposed rule, we used the term ``comparable'' in the 
proposed fourth payment alternative so that the public will realize 
that this payment alternative is not exactly the same as the one that 
is similarly worded in Sec.  412.534(c)(2), (d)(1), and (e)(1), 
discussed in section VI.B. of the RY 2007 proposed rule.
    Therefore, in the RY 2007 proposed rule, we proposed two changes to 
the existing SSO payment provision. First, we proposed to decrease the 
percentage of costs in the current SSO payment formula (that is, 120 
percent of the costs) to 100 percent of costs. Secondly, we proposed to 
add a fourth option that Medicare would pay an LTCH PPS payment amount 
comparable to the amount that would have otherwise been paid under the 
IPPS for such a case, if that amount is lower than the other three 
payment alternatives.
    As we discussed in the RY 2007 LTCH PPS proposed rule, we 
established special provisions for the SSO policy for subclause (II) 
LTCHs in the RY 2004 LTCH PPS final rule (68 FR 34147). We proposed to 
exempt subclause (II) LTCHs from the proposed additional revisions to 
the SSO policy discussed above until the 5th year of the phase-in of 
the LTCH PPS for such a LTCH (that is, for discharges occurring during 
cost reporting periods beginning on or after October 1, 2006). This 
proposed approach is consistent with our existing policy as it applies 
to subclause (II) LTCHs in that these LTCHs do not become subject to 
the specific SSO percentages established for subclause (I) LTCHs until 
cost reporting periods beginning on or after October 1, 2006. 
Therefore, since the percentages applied under the proposed SSO policy 
for subclause (II) LTCHs would not be reduced to 120 percent until the 
fifth year of the transition, the proposed reduction from 120 percent 
of the estimated costs of the case to 100 percent of the estimated 
costs would not apply to a subclause (II) LTCH until that time, nor 
would the additional proposed alternative, of an amount payable under 
Subpart O comparable to the amount that would otherwise be paid under 
the IPPS, apply to discharges from a subclause (II) LTCH until such a 
LTCH's cost reporting period beginning on or after October 1, 2006. 
Therefore, under the proposed policy discussed in the RY 2007 LTCH PPS 
proposed rule, SSO discharges at a subclause (II) LTCH that had a 
January 1 through December 31 cost reporting period, for example, would 
be subject to the proposed changes to the SSO provision (including the 
proposed reduction to 100 percent of costs and the proposed addition of 
the fourth option of ``a payment comparable to what would otherwise 
have been paid under the IPPS'') for discharges occurring on or after 
the start of its 5th year of the transition on January 1, 2007.
    The proposal to exempt subclause (II) LTCHs from the proposed 
revisions to the SSO policy that would be effective beginning in RY 
2007 until cost reporting periods beginning on or after October 1, 2006 
was consistent with our understanding of Congressional intent in 
establishing this special category of LTCHs in section 4417(b) of the 
BBA. The Congress provided an exception to the general definition of 
LTCHs under subclause (I) and subclause (II). In the RY 2004 LTCH PPS 
final rule (68 FR 34148), we evaluated the SSO policy for subclause 
(II) LTCHs, and we noted that the unique Congressional mandate set 
forth in section 1886(d)(1)(B)(iv)(II) of the Act circumscribes such a 
LTCHs' admission policies to the extent that it is being identified as 
a LTCH to provide a particular type of service (for which the ALOS is 
greater than 20 days) to a particular population (at least 80 percent 
have a principal diagnosis of neoplastic disease). We stated that we 
believed that a LTCH in this category might not be able to readily 
address the type of patients and the costs it incurs for those patients 
as would LTCHs described under subclause (I). We believed that it was 
necessary to adjust the original short stay policy for

[[Page 27850]]

subclause (II) LTCHs during the 5-year transition period, so that a 
LTCH of this type could continue to serve its community, as intended by 
the Congress (68 FR 34148).
    As we discussed in the RY 2007 LTCH PPS proposed rule, we proposed 
that hospitals that qualify as subclause (II) LTCHs would become 
subject to the proposed changes to the SSO provision, when a subclause 
(II) LTCH would become fully subject to the general SSO policy at Sec.  
412.529, which will be for discharges occurring in the first cost 
reporting period beginning on or after October 1, 2006.
    We received many comments on our proposed revisions to the SSO 
policy representing the views of trade associations representing LTCHs, 
both for-profit and not-for-profit LTCH groups, medical corporations 
that include LTCHs, state medical societies, a Chamber of Commerce, 
legislators, physicians and other hospital staff, and several 
interested citizens. In general, commenters did not support our 
proposed policy and the payment reductions to LTCHS that would result 
if it was finalized.
    Comment: Several commenters supported CMS's goal of analyzing the 
role of LTCHs as one of several treatment settings among post-acute 
providers for Medicare beneficiaries. However, they urged us not to 
finalize the portion of the proposed SSO policy that would include the 
alternative payment option for payment comparable to the IPPS payment 
amount. These commenters believe that finalizing this policy would 
result in drastic payment reductions and consequential losses to the 
LTCHs. One commenter noted that our proposed policies had made it 
necessary to answer the following question: ``Where is the proper place 
for LTCHs along the continuum of care for Medicare beneficiaries and 
how is this place substituted for in areas where there are no or few 
LTCHs.'' The commenter further stated that this was ``a proper question 
to ask for a prudent purchaser of care'' but urged us to arrive at a 
``clinically-based'' answer to this question.
    Response: We appreciate the commenters' recognition of the very 
serious issues regarding LTCHs underlying our proposed policy 
revisions. The commenter is also correct in questioning the role of 
LTCHs in the continuum of beneficiary care. As a provider category, 
LTCHs were created by section 1886(d)(1)(B)(iv)(I) of the Act and 
defined by the statute: a LTCH is ``a hospital which has an average 
inpatient LOS (as determined by the Secretary) of greater than 25 
days.'' (Subclause (II) LTCHs, discussed below in these responses, 
which were established under the BBA of 1997, function under highly 
specific requirements.) As a ``prudent purchaser of care,'' we believe 
that we have the mandate to appropriately pay for the hospital-level 
services provided to Medicare beneficiaries. The RTI study, that is 
discussed in section XII.B. of the preamble to this final rule, 
represents a highly significant step in the direction of evaluating the 
clinical role for LTCHs. In addition to the RTI study, there is 
considerable attention being focused by CMS on issues of substitution 
of services among provider types, and the potential for the development 
of a uniform assessment tool across post-acute providers. As RTI 
evaluates the feasibility of identifying clinically-based criteria for 
LTCH patients, it continues to concern us that patients with the same 
general medical profile as these LTCH patients are also being treated 
nationally at acute care hospitals, generally as HCOs. Although, as 
described in detail in our responses below, we are not finalizing this 
specific revision to the SSO policy, as proposed, we continue to be 
concerned about the significant number of extremely short-stay patients 
currently receiving treatment at LTCHs, a provider type that is 
distinguished solely by its focus on long-stay hospital-level care.
    Comment: While many commenters urged us not to finalize the 
proposed formula for SSO payments that included the option of an IPPS-
comparable payment amount, they did express considerable understanding 
of our concerns about the payment incentives inherent in the existing 
SSO policy, particularly with regards to the very short stays. We 
received numerous suggestions on an approach more targeted with the 
goals of avoiding excessive payment for such very short stays, avoiding 
underpayment of appropriate admissions, and also avoiding any payment 
incentives that would allow LTCHs to retain patients unnecessarily to 
exceed the SSO thresholds. Although opposing these proposed revisions, 
one commenter encouraged us to modify the proposed policy to strike a 
balance between payment adequacy and financial incentives.
    A number of commenters urged us to establish a category of very 
short stay discharges (VSSDs) mirroring the payment policy for stays of 
1 through 7 days that we proposed when we designed the LTCH PPS (67 FR 
13453, March 22, 2002) suggesting that we continue to pay the remainder 
of SSO cases under the existing SSO policy. The commenters presented 
several other variations in the definition of a VSSD and also 
suggestions for a SSO policy payment methodology, which include:
     VSSD cases would be defined as cases with a LOS of less 
than \1/6\ of the geometric ALOS. These VSSDs would be paid under our 
proposed policy.
     VSSD cases should be defined from 1 through 5 or 7 days, 
and be reimbursed at 100 percent of cost.
     VSSD cases should be reimbursed at a percentage of cost 
(for example, 95 percent) with the 5 percent reallocated to other SSO 
payment levels.
     Define VSSD cases as 10 to 20 percent of the geometric 
ALOS: (1) Reduce costs from 120 percent to 100 percent for VSSD cases; 
(2) For other cases up to \5/6\ of the geometric mean LOS, 110 percent 
costs.
     Create three categories of SSO cases--VSSD cases, 
intermediate short stay cases, and all other short stay cases up to \5/
6\ (existing definition of SSO): (1) A VSS case is a case that has a 
LOS equal to or less than \2/6\ of the geometric ALOS for a LTC-DRG and 
paid the lesser of the three existing options with 100 percent of cost 
(instead of 120 percent); (2) Intermediate short stay cases would be 
between \5/6\ of the geometric ALOS and \4/6\ of the geometric ALOS, 
and paid the lesser of the three existing options with 110 to 115 
percent of cost (instead of 120 percent); (3) All others would be those 
cases that exceed \4/6\ of the geometric ALOS but are less than or 
equal to \5/6\ of the geometric ALOS and paid the least of three 
existing options with 115 to 120 percent of cost.
     For cases with lengths of stay less than or equal to 20 
percent of the geometric ALOS, use IPPS-comparable payment rates.
     For VSSD cases, the SSO payment should be 100 percent of 
costs for 8-20 day stays and the full LTC-DRG for stays of 20 or more 
days. LTCH cases with a LOS greater than 20 days should be removed from 
the SSO definition.
     For cases where the ALOS is equal to or less than 20 
percent of the geometric mean LOS, Medicare should pay less than cost 
(that is, at 80 percent or 90 percent of cost) and reallocate the 
remainder to other LTCH PPS payments.
     Pay all SSO patients at 110 percent of cost.
     For VSSD cases, payments should be 100 percent costs or 22 
percent per diem; for stays of 8 days through the up to \5/6\ the 
geometric ALOS, use the same method as presently used.
     Convert the IPPS comparable payment to per diem (similar 
to transfer DRG methodology) and pay based on

[[Page 27851]]

the actual number of days that a patient is in the LTCH without capping 
the payment at the full IPPS DRG to recognize the amount of resources 
and effort expended by the LTCH.
     Pay SSOs under an additional LTC-DRG similar to CMG 5000 
under the IRF PPS if the LOS is below a certain number of days. It 
would receive a low fixed payment.
    Response: We have carefully evaluated the comments that we received 
on the proposed modifications to the SSO payment policy. Specifically, 
we understand the commenters' concerns that applying the option of an 
IPPS-comparable payment to all SSO cases at LTCHs would result not only 
in paying for very short stay cases under this policy, but also could 
result in making such a payment under the same LTCH PPS SSO policy 
option for a patient who is treated for a relatively long stay. 
Accordingly, under our finalized policy, we believe that it is 
appropriate to provide that as the length of a SSO stay increases, the 
case begins to resemble a more ``typical'' LTCH stay and 
consequentially, it is appropriate that payment should be based 
increasingly more on what would otherwise be payable under the LTCH 
PPS. Therefore, under the SSO policy at Sec.  412.529, effective for 
discharges occurring on or after July 1, 2006, we will pay the lesser 
of 100 percent of the estimated costs for the discharge, 120 percent of 
the per diem of the LTC-DRG multiplied by the LOS, the full LTC-DRG 
payment, or a blend of the comparable IPPS per diem payment amount 
(capped at the full IPPS comparable payment amount) and the 120 percent 
of the LTC-DRG per diem payment amount (as described in greater detail 
below). The IPPS comparable payment amount portion of the blend at 
Sec.  412.529 is determined in the same manner as we proposed in the RY 
2007 LTCH PPS proposed rule (71 FR 4688 through 4690), and as described 
above in this section. (As noted elsewhere, the SSO policy has been a 
feature of the LTCH PPS since its inception for FY 2003 based on data 
analysis of FY 1998 and 1999 MedPAR files. The data simulations and 
projections upon which the existing policy was based, as well as 
alternatives that we evaluated, are detailed in the FY 2003 final rule 
for the LTCH PPS (67 FR 55954, 55995-56006).)
    We are not establishing a category of VSSDs or VSSOs, suggested by 
a significant number of commenters for the same reason that we 
originally decided not to distinguish such cases at the inception of 
the LTCH PPS for FY 2003 (67 FR 55954, 56000 through 56002). At that 
time, we determined that such a policy produced a payment ``cliff,'' by 
which a significantly higher payment would result from an 8 day stay 
than from a 7 day stay. Although we agree that generally, LTCH stays of 
7 days or less are the most obvious example of a stay that should not 
be treated at an LTCH (and some of the commenters suggested a VSSD 
threshold of as few as 5 days), we believe that the policy that we are 
finalizing, described in detail below, addresses this concern without 
providing an inappropriate payment incentive for extending a patient 
stay at an LTCH. The payment alternative that we are finalizing is 
based on recognizing the distinction between the shortest stays and 
those stays that, although still technically are SSOs, more typically 
represent the type of cases for which the LTCH provider category was 
established.
    In this final rule, therefore, under the SSO policy at revised 
Sec.  412.529, beginning with discharges occurring during RY 2007, we 
will pay the lesser of 100 percent of the estimated costs of the 
discharge (as we proposed in the RY 2007 LTCH PPS proposed rule), 120 
percent of the LTC-DRG per diem payment amount multiplied by the LOS, 
the full LTC-DRG payment, or an LTCH PPS payment based on a blend of 
the IPPS-comparable per diem payment amount (capped at the full IPPS 
comparable payment amount), and the 120 percent of the LTC-DRG per diem 
payment amount (as derived from a feature of the existing SSO policy) 
(as described in greater detail below).
    We are providing for this fourth option based on the above 
described blend of payments because, as noted above, we believe that as 
the length of a SSO stay increases, the case begins to resemble a more 
``typical'' LTCH stay as defined under section 1886(d)(1)(B)(IV)(I) of 
the Act and envisioned by the statutes authorizing the establishment of 
the LTCH PPS. Consequentially, under the blend alternative to the SSO 
policy at Sec.  412.529(c)(2)(iv) that we are establishing in this 
final rule, as the LOS of the SSO case increases, the percentage of the 
IPPS comparable per diem amount will decrease and the percentage of the 
120 percent of the LTC-DRG specific per diem amount will increase. We 
are further ``capping'' the IPPS-comparable per diem portion of the 
blend option at an amount comparable to the full IPPS payment amount, 
described below, for a specific DRG. We believe that capping the IPPS 
comparable per diem amount portion of the blend option of the SSO 
payment formula at the full IPPS comparable payment amount is 
consistent with the overall premise of the blend alternative, stated 
above. In capping the IPPS-comparable portion of the blend payment at 
an amount that would be comparable to the full IPPS comparable payment 
amount, we affirm the underpinnings of the revised SSO policy that we 
are finalizing, which are, that as the LOS of a LTCH hospitalization 
increases, the treatment resources and costs associated with the stay 
are more in keeping with typical payments under the LTCH PPS and less 
comparable to an IPPS stay. The IPPS-comparable amount under this 
finalized SSO payment option, will be determined by the methodology 
that we proposed in the RY 2007 proposed rule for the fourth option to 
the SSO payment adjustment. Although we are not finalizing that policy, 
we are adopting the definition of ``IPPS comparable'' established in 
the RY 2007 LTCH PPS proposed rule.
    We would also note that the patient classification system for both 
the IPPS and the LTCH PPS is the DRG system. The only distinction 
between the DRG systems used by the IPPS and the LTCH PPS is the 
weights assigned to each DRG that we derive from the data emerging from 
acute care hospitals and LTCHs, respectively. Under the blend payment 
option for SSOs described below, as the LOS of a SSO increases, the 
percentage of the payments based on the LTC-DRGs will increase and the 
percentage of the payment based on the IPPS-comparable payment derived 
from the IPPS DRGs will decrease.
    Specifically, in the RY 2007 LTCH PPS proposed rule, we proposed 
that we would calculate an amount payable under subpart O comparable to 
what would otherwise be paid under the IPPS for the costs of inpatient 
operating services which would be based on the standardized amount 
determined under Sec.  412.64(c), adjusted by the applicable DRG 
weighting factors determined under Sec.  412.60 as specified at Sec.  
412.64(g). This amount would be further adjusted to account for 
different area wage levels by geographic area using the applicable IPPS 
labor-related share, based on the CBSA where the LTCH is physically 
located as set forth at Sec.  412.525(c) and using the IPPS wage index 
for non-reclassified hospitals published in the annual IPPS final rule. 
(In the RY 2006 LTCH PPS final rule (70 FR 24200), we discuss the 
inapplicability of geographic reclassification procedures for LTCHs.) 
For LTCHs located in Alaska and Hawaii, this amount would also be 
adjusted by the applicable proposed

[[Page 27852]]

COLA factor used under the IPPS published annually in the IPPS final 
rule. (Currently these same COLA factors are used under both the IPPS 
and the LTCH PPS.)
    Additionally, this SSO proposed revised payment adjustment 
alternative (that is, an amount comparable to what would be paid under 
the IPPS for the case) could also include a DSH adjustment (see Sec.  
412.106), if applicable.
    Under the proposed revision to the LTCH PPS SSO payment adjustment 
in the case of a LTCH that is a teaching hospital, we explained that we 
would determine the IME payment adjustment for the LTCH by imputing a 
limit on the number of full-time equivalent (FTE) residents that may be 
counted for IME (IME cap) based on the LTCH's direct GME cap as set 
forth at Sec.  413.79(c)(2) (which would already have been established 
for a LTCH which had residency programs). Thus, we proposed calculating 
an IME payment for this LTCH that is comparable to the IPPS payment 
formula set forth at Sec.  412.105. The use of a proxy for the IME cap 
would be necessary because it would not be appropriate to apply the 
IPPS IME rules literally in the context of this LTCH PPS payment 
adjustment. Under the IPPS, IME payment regulations at Sec.  412.105, 
limits were established on the number of FTE residents a hospital is 
permitted to count for IME payments based the number of residents 
reported by the hospital 1996 cost report. This IME FTE resident cap 
under the IPPS would not translate appropriately to a LTCH. Since a 
LTCH was not paid IME in 1996 it would not have reported any FTE 
residents for IME purposes on its 1996 cost report. Therefore, we 
proposed using the LTCH's direct GME cap for the purpose of calculating 
the proposed payment adjustment alternative for SSOs. We believed this 
proposal was reasonable since it would cap residents for IME payment 
purposes based on the best available data on residency programs at 
LTCHs (which could be computed from direct GME data for LTCHs that had 
residency programs). Using an imputed GME cap would enable us to factor 
an adjustment for residency programs into a Medicare payment under the 
LTCH PPS for those SSO cases where the least of the payment 
alternatives is an amount under the LTCH PPS comparable to what would 
be paid under the IPPS. Both a DSH adjustment and an IME adjustment, as 
necessary, could be computed from data already collected on the LTCH's 
cost report.
    As we discussed in the RY 2007 LTCH PPS proposed rule, an IPPS 
comparable amount under the LTCH PPS for the purposes of the SSO 
payment adjustment, would also include payment for inpatient capital-
related costs, based on the capital Federal rate at Sec.  412.308(c), 
which would be adjusted by the applicable IPPS DRG weighting factors. 
This amount would be further adjusted by the applicable geographic 
adjustment factors set forth at Sec.  412.316, including wage index 
(based on the CBSA where a LTCH is physically located and derived from 
the IPPS wage index for non-reclassified hospitals as published in the 
annual IPPS final rule), and large urban location, if applicable.
    A LTCH PPS payment amount comparable to what would be paid under 
the IPPS would not include additional payments for extraordinarily high 
cost cases under the IPPS outlier policy (Sec.  412.80(a)). Under 
existing LTCH PPS policy, a SSO case that meets the criteria for a LTCH 
PPS HCO payment at Sec.  412.525(a)(1) (that is, if the estimated costs 
of the case exceed the adjusted LTC-DRG SSO payment plus the fixed-loss 
amount) would receive an additional payment under the LTCH PPS HCO 
policy at Sec.  412.525(a) (67 FR 56026; August 30, 2002). For purposes 
of HCOs under the proposed SSO policy, we would continue to use a 
fixed-loss amount calculated under Sec.  412.525(a), and not a fixed-
loss amount based on Sec.  412.80(a). Medicare would pay the LTCH 80 
percent of the costs of the case that exceed the sum of the applicable 
option and the fixed-loss amount determined under Sec.  412.525(a). As 
we discussed in the RY 2007 LTCH PPS proposed rule, we used the term 
``comparable'' in the proposed fourth payment alternative so that the 
public will realize that this payment alternative is not exactly the 
same as the one that is similarly worded in Sec.  412.534(c)(2), 
(d)(1), and (e)(1), discussed in section VI.B. of the RY 2007 LTCH PPS 
proposed rule.
    Therefore, under the SSO policy that we are finalizing in this 
final rule, we are providing for a blend alternative under the LTCH PPS 
at Sec.  412.529(c)(2)(iv), that is based on a percentage of the 
payment calculated using the standard Federal payment rate and LTC-DRG 
weights utilized under the LTCH PPS and, as described above, a 
percentage of the paymentscomparable to the standard Federal rates, DRG 
weights, and applicable payment policies established under the IPPS.
    Specifically, for the ``LTCH'' component of this SSO payment 
option, the percentage based of the 120 percent of the LTC-DRG per diem 
amount will be based on the ratio of the (covered) LOS of the case to 
the lesser of the SSO threshold for the LTC-DRG (that is, \5/6\ of the 
geometric ALOS of the LTC-DRG) or 25 days (as discussed below). In 
addition, the LOS in the numerator may not exceed the number of days in 
the denominator (that is, the percentage may not exceed 100 percent). 
The remaining percent of the blend alternative at Sec.  
412.529(c)(2)(iv) (that is, 100 percent minus the percentage that is 
based on the 120 percent of the LTC-DRG per diem amount explained 
above) will be applied to the IPPS comparable per diem amount, detailed 
above. For purposes of the blend payment option, we have also specified 
that the IPPS comparable per diem amount will be capped at the full 
IPPS comparable amount, as explained below.
    In explaining this blend payment option, we want to emphasize, 
there has been no change in our existing policy at Sec.  412.503 
regarding Medicare payment for covered days under the LTCH PPS. 
Therefore, under the SSO policy at revised Sec.  412.529, including the 
above described blend option, until the SSO threshold (\5/6\ the ALOS 
for each LTC-DRG) is exceeded at which point a full LTC-DRG payment is 
generated, Medicare payment for a specific case is based on the number 
of days of coverage remaining to each beneficiary. We also want to note 
that in determining the percentage of the LTC-DRG-based portion of the 
blend option, we utilize the lesser of 25 days or the SSO threshold 
(\5/6\ ALOS of each LTC-DRG) as the number divided into the covered 
days of the stay. In keeping with the underlying premise of the blend 
option under the SSO policy, we believe that as the length of a SSO 
stay increases, the stay more closely resembles a characteristic LTCH 
stay. Consequently, for specific purposes of the blend, we believe that 
utilizing the ``greater than 25 day'' statutory definition as a 
benchmark for identifying an appropriate LTCH hospitalization 
recognizes Congressional intent in establishing LTCHs as a distinct 
provider category. In computing the blend option, therefore, as 
described below, we believe that it is both fair and reasonable that 
for each patient stay, we utilize the lesser of the LTC-DRG's specific 
SSO threshold or 25 days as the denominator.
    The following example illustrates how the blend alternative at 
Sec.  412.529(c)(2)(iv) would be determined where the LTCH patient has 
a covered LOS of 11 days, has an estimated cost of $11,775, and is 
grouped to hypothetical DRG XYZ. For purposes of this example, for DRG 
XYZ, the full LTC-DRG payment is $38,597.41, the LTCH PPS geometric 
ALOS is 33.6 days,

[[Page 27853]]

the LTCH PPS SSO threshold (that is, \5/6\ of the geometric ALOS) is 
28.0 days, the full IPPS comparable amount is $8,019.82, and the IPPS 
geometric ALOS is 4.5 days. For this example, the blend alternative at 
Sec.  412.529(c)(2)(iv) would be calculated as follows:
     Step (1): Determine the LTC-DRG per diem portion of the 
blend alternative at Sec.  412.529(c)(2)(iv).
    (a) The 120 percent of the LTC-DRG per diem amount for the 11 days 
stay is equal to the full LTC-DRG payment divided by the geometric ALOS 
of LTC-DRG XYZ multiplied by the covered LOS and multiplied by 1.2.
[GRAPHIC] [TIFF OMITTED] TR12MY06.000

    (b) The percentage of the 120 percent of the LTC-DRG per diem 
amount for 11 days is calculated by dividing the covered LOS by the 
lesser of the \5/6\ ALOS of LTC-DRG XYZ or 25 days (that is, 11 days / 
25 days = 0.44). (In this example, 25 days was used in the denominator 
since the \5/6\ ALOS of LTC-DRG XYZ (28.0 days) is greater than 25 
days. If the \5/6\ ALOS of LTC-DRG XYZ was less than 25 days, that 
value would have been used in the denominator of this calculation. In 
addition, the LOS in the numerator may not exceed the number of days in 
the denominator (that is, the percentage may not exceed 100 percent).
    (c) Determine the LTC-DRG per diem portion of the blend alternative 
at Sec.  412.529(c)(2)(iv) by multiplying the percentage determined in 
Step 1b by the 120 percent of the LTC-DRG per diem amount for the 11 
days (from Step 1a) (that is, 0.44 x $15,163.28 = $6,671.84).
     Step (2): Determine the IPPS comparable per diem portion 
of the blend alternative at Sec.  412.529(c)(2)(iv).
    (a) The IPPS comparable per diem amount is equal to the full IPPS 
comparable amount divided by the geometric ALOS of IPPS DRG XYZ 
multiplied by the covered LOS (that is, $8,019.82 / 4.5 days x 11 days 
= $19,604.00. However, since this amount exceeds the full IPPS 
comparable amount ($8,019.82), only the full IPPS comparable amount 
($8,019.82) will be used in the blend alternative calculation.
    (b) The percentage of the IPPS comparable per diem amount is 
calculated by subtracting the percentage determined in Step 1b from 100 
percent (that is, 1 minus the covered LOS divided by the lesser of the 
\5/6\ ALOS of DRG XYZ or 25 days) or 1 minus 0.44 (as shown in Step 1b 
= 0.56).
    (c) Determine the payment amount of the IPPS comparable per diem 
portion of the blend alternative at Sec.  412.529(c)(2)(iv) for the 11-
day stay by multiplying the percentage determined in Step 2b by the 
IPPS comparable per diem amount (from Step 2a), (that is, 0.56 x 
$8,019.82 = $4,491.10).
     Step (3): Compute the total payment amount of the blend 
alternative at Sec.  412.529(c)(2)(iv) by adding the LTC-DRG per diem 
portion (Step 1c) and the IPPS comparable per diem portion (Step 2c), 
(that is, 6,671.84 + $4,491.10 = $11,162.94).
    Table 10 provides detailed instructions for calculating payments 
using the blend alternative.

BILLING CODE 4120-01-P

[[Page 27854]]

[GRAPHIC] [TIFF OMITTED] TR12MY06.001

BILLING CODE 4120-01-C

[[Page 27855]]

    In this example, the SSO payment would equal $11,162.94 (using the 
blend alternative at Sec.  412.529(c)(2)(iv)) since it is lower than 
100 percent of cost ($11,775), 120 percent of the LTC-DRG per diem 
($15,163.28), and the full LTC-DRG payment ($38,597.41).
    If, in the above example, the covered LOS of the patient would have 
been 24 days, the blend alternative percentage of the 120 percent of 
the LTC-DRG per diem amount in step 1b would be 0.96 (instead of 0.44) 
and the blend percentage of the IPPS comparable per diem amount in step 
2c would be 0.04 (instead of 0.56). For a covered LOS of 24 days, the 
120 percent of the LTC-DRG per diem amount would be $33,083.97. The 
comparable IPPS per diem amount would be $42,772.37, which is greater 
than the full IPPS comparable amount ($8,019.82). Thus, for a covered 
LOS of 24 days, the amount determined under the blend alternative at 
Sec.  412.529(c)(2)(iv) would be as follows:

$32,080.97=[(0.96 x $33,083.52) + (0.04 x $8,019.82)].

    As the LOS of an SSO case approaches the SSO threshold (that is, 
\5/6\ of the geometric ALOS of the LTC-DRG), the amount determined 
under the blend alternative at Sec.  412.529(c)(2)(iv) more closely 
approximates a full LTC-DRG payment. For instance, in the example with 
a covered LOS of 24 days discussed above, the amount determined under 
the blend alternative at Sec.  412.529(c)(2)(iv) ($32,080.97) is 
approximately 83 percent of the full LTC-DRG payment ($38,597.41).
    For cases with very short lengths of stay (that is, even less than 
the IPPS ALOS), the IPPS comparable per diem amount portion of the 
blended payment amount would be less than the full IPPS comparable 
payment amount based on the per diem calculation described above, which 
would be a percentage of the full IPPS comparable payment. Furthermore, 
as described below, as the LOS reaches the lower of the five-sixths SSO 
threshold or 25 days, the payment could be equal to the full LTC-DRG 
(based on existing SSO policy). Because we are limiting the denominator 
of the blend percentage to the lesser of the \5/6\ ALOS or 25 days, for 
SSO cases in LTC-DRGs that have an SSO threshold of greater than or 
equal to 25 days and that have a covered LOS of 25 days or more, the 
blend alternative at Sec.  412.529(c)(2)(iv) will equal 120 percent of 
the LTC-DRG per diem amount determined under Sec.  412.529(d)(1). For 
instance, in the example presented above in this section, where the SSO 
threshold for DRG XYZ is equal to 28.0 days, for an LTCH patient with a 
covered LOS of either 25, 26, 27 or 28 days, the blend alternative at 
Sec.  412.529(c)(2)(iv) will equal 120 percent of the LTC-DRG per diem 
amount based on the covered LOS of the stay (that is, $33,083.52 for a 
25-day LOS). Under this revised SSO policy, once the covered LOS equals 
25 days, Medicare payment for an SSO case would be based on the lesser 
of 100 percent of the estimated cost of the case, 120 percent of the 
per diem LTC-DRG multiplied by the LOS or the full LTC-DRG since the 
blend option as described above, at that 25-day point, will be based on 
100 percent of the LTC-DRG per diem payment amount and 0 percent of the 
IPPS comparable per diem payment amount. Therefore, once the LOS is 25 
days or more, the blend method ceases to apply for purposes of 
calculating the payment amount and instead, the payment amount for the 
fourth option is equal to one of the other options: 120 percent of the 
LTC-DRG per diem amount. In this example, calculation of SSO payment 
for days 26, 27, or 28 would be based on the lesser of those 
alternatives and if the patient remained at the LTCH on or after day 
29, the SSO threshold would be exceeded and a full LTC-DRG would be 
generated.
    Although we did not adopt many of the commenters' suggestions that 
we distinguish VSSO or VSSD cases and pay them either at or below cost, 
we do believe that this finalized payment policy for SSO cases endorses 
their premise that such cases do not fit the typical profile of LTCH 
cases and it can be reasonably argued that such cases should not be 
paid similarly to those that are more characteristic of LTCH cases. In 
general, we believe that our finalized policy, which transitions from a 
larger percentage of the LTCH PPS payment that is based on the IPPS 
comparable per diem amount to a higher proportion of payment based on 
the 120 percent of the LTC-DRG per diem amount as the LOS increases, 
realistically addresses our significant concerns that the shortest LOS 
cases could have continued to be treated at an acute care hospital and 
not require an LTCH stay and therefore payments to LTCHs under the LTCH 
PPS should be adjusted accordingly.
    Comment: We received numerous comments that praised the quality 
care given to Medicare beneficiaries by the LTCHs in their areas and 
urged us not to make significant cuts in Medicare payments which they 
fear would result in reduced services. The commenters asserted that, 
coupled with CMS' decision to maintain LTCH standard Federal rates from 
RY 2006, revision of the payment adjustment for SSO patients will be 
detrimental to the industry as costs of providing care will exceed 
payment. The commenters further stated that underpayment to LTCHs will 
cause patients with complex medical conditions to lose access to 
appropriate care and increase costs to acute care hospitals which will 
be forced to continue caring for these sicker patients. The commenters 
believed that the revised SSO payment policy, as proposed, would have a 
profound impact on the entire health care system of their communities 
since their LTCHs are a critical component of the state health care 
delivery system. They state that since LTCHs offer specialized services 
not available elsewhere, severe cutbacks for LTCHs could resonate 
throughout the entire health care system. One commenter noted that CMS 
made a statement that it does not expect any changes in quality of care 
or access to services for Medicare beneficiaries under the LTCH PPS 
based on proposed rule policies. However, one of the commenters 
believes, to the contrary, a decrease in payments will have pervasive 
effects on LTCHs. Moreover, the commenter pointed out that the impact 
of changes in our payments to LTCHs because of the proposed SSO policy 
revisions will not only affect services offered to ``the most 
vulnerable patients,'' but also will have an impact on the staff of the 
LTCHs. Several of the commenters specify that they envision that acute 
care hospitals will be overtaxed and incur additional costs without 
being able to free up ICU beds for patients who need short-term acute 
care services. They also state that the acute care hospitals in their 
communities may not be able to meet patient needs for those needing 
LTCH services.
    Response: We understand the serious concerns expressed by the 
commenters and, although we are not finalizing the particular SSO 
policy revisions as it was proposed, we want to assure the commenters 
that we are aware of their concerns. We also agree that if a Medicare 
beneficiary is appropriately referred, and admitted, to one of the 
approximately 400 LTCHs in the United States for a complex medical 
condition, the beneficiary could receive excellent medical care from a 
highly trained and committed professional staff. As discussed above in 
this section, we revisited the specific proposed payment revisions to 
the SSO policy based on the many clear and well-crafted comments that 
we received, and the policy that we are finalizing will not have the 
more

[[Page 27856]]

extensive financial consequences on longer SSO cases expected by the 
commenters from the proposed policy changes. As explained in more 
detail in the impact section of this notice, we estimate that the 
financial impact on LTCHs from this final policy will be significantly 
less than the original proposed policy.
    Therefore, we do not believe that the revisions to the SSO policy 
that we are finalizing will result in LTCHs going out of business nor 
that significant services would have to be curtailed with dire 
consequences for beneficiaries, staff or the local medical care system. 
As noted elsewhere, our data indicates that for FY 2003, the aggregate 
margins for LTCHs were 7.8 percent and for 2004, they were 12.7 
percent. Therefore, we believe that even with decreased Medicare 
payments for SSO patients, such as we are envisioning based on this 
finalized payment policy and detailed in the Impact (see section XV. to 
this final rule), we believe that LTCHs will generally be able to 
continue delivering high quality medical care to their patients. We 
continue to believe, however, that acute-care hospitals should not be 
discharging patients to LTCHs without having provided a full episode of 
care and we also continue to have concerns about LTCHs admitting those 
short stay patients who could otherwise continue to be treated in acute 
care hospitals. We have revised our policy under the SSO adjustment and 
in finalizing the blend option for paying SSO patients, we do not 
believe that we are requiring any additional determinations nor are we 
creating any circumstance that should not already be incorporated in 
the determination to admit a patient to an LTCH following treatment at 
an acute care hospital.
    Comment: Numerous commenters argued that our proposed IPPS-
comparable payment option under the SSO policy, if finalized, could be 
expected to discourage physicians from discharging patients from acute 
care hospitals and admitting them to LTCHs. Thus, they charged that we 
were establishing a system wherein clinical judgment is being trumped 
by determinations based solely on payment. The commenters further 
stated that since physicians discharge patients to LTCHs because it is 
in the patients' best interests, we would be substituting our judgment 
for a physician, setting a very dangerous precedent. Furthermore, 
physicians cannot be expected to guess the LOS or the death of a 
severely ill patient upon admittance to the LTCH. The commenters also 
note that there is available data supporting the medical determination 
that physicians are discharging patients to the LTCH setting because 
the patient's needs are better served in the LTC setting than in an 
acute care hospital setting.
    Response: As stated above in this section, we have revised our 
proposed IPPS-comparable payment option in light of the comments that 
we have received and after further data and policy analysis. Contrary 
to what the commenter states, however, the policy objective underlying 
the proposed SSO rule was to preclude LTCHs and physicians from taking 
advantage of a system that significantly overpays for patients that do 
not require the extensive resources that such high payments are 
intended to support. As discussed later, we recognize that some SSO 
cases are unavoidable due to death or an unexpected clinical 
improvement and early discharge. However, we have noted that in a 
community where both acute care and LTCH beds are available, patients 
are routinely transferred from the acute care hospital to the LTCH for 
the remainder of care just because the LTCH resource is available. We 
are concerned that this trend has increased exponentially because it 
provides an acceptable disposition of the patient for the physician, 
and because it is an expeditious means of lowering the acute hospital 
LOS and costs. There is no question that the multidisciplinary approach 
for certain complex patients (for example, ventilator weaning) is 
appropriate. However, we are very concerned that the LTCH is assuming 
the role of the acute care hospital for many other patients, at a far 
higher cost, which it is possible to do as long as the LTCH continues 
to maintain an ALOS of 25 days for purposes of qualifying for payments 
under the LTCH. We do not believe, moreover, that the payment policy 
option that we are finalizing for SSO discharges will deter physicians 
from delivering appropriate care to beneficiaries or from making 
appropriate referrals to LTCHs. We are seeking, in finalizing this 
payment policy, to remove any financial incentive that could encourage 
an LTCH to admit a patient from an acute-care hospitals prior to that 
patient having received a full episode of care at the acute care 
hospital.
    Comment: Several commenters cited a study centered at Barlow 
Respiratory Hospital that charted the course of ventilator weaning 
treatment for 1419 medically unstable patients at 23 LTCHs from March 
2002 through February 2003. The study reports that more than 50 percent 
of this group of patients were weaned from the ventilators and 
evidenced improvement both neurologically and functionally. The 
commenters assert that this study exemplifies the excellent level of 
care for such patients at LTCHs.
    Response: We agree with the commenters that the results of the 
``Barlow'' study indicate a significant rate of very positive outcomes 
for the very sick LTCH patients who were included in the study. In the 
late 1990s, we sponsored a ventilator demonstration study which 
included, among other acute care settings, the Mayo Clinic and Temple 
University Hospital, that also reported impressive results. We further 
understand that the results of the Barlow study were used for the 
establishment of national ventilator-weaning protocols issued by the 
National Institutes of Health and that input from the Temple University 
program continues to be critical in formulating national standards. We 
believe that these programs established a level of excellence that 
should be emulated by all hospital-level facilities that treat 
ventilator-dependent patients, including acute care hospitals, LTCHs, 
and IRFs. Accordingly, we believe it is not simply the fact that the 
patient is treated at a LTCH that is critical to predicting positive 
results. Rather, it is the type of clinical intervention that is 
furnished to the patient at the hospital. In many cases that 
intervention is currently exemplified at acute care IPPS hospitals, as 
well as at LTCHs.
    Comment: Several commenters claim that even for what we would term 
``appropriate'' admissions, our proposed payment option under the SSO 
policy that could generate an IPPS-comparable payment will erect 
barriers to the use of LTCHs. One commenter described the typical LTCH 
patient: An elderly patient with persistent multiple-system failures 
who is de-conditioned and protocol-resistant. The commenter asserted 
that these patients respond impressively to the aggressive blending of 
therapeutic interventions, interdisciplinary teams, and medical 
intervention that is not otherwise available in the community or 
tertiary hospital setting. The commenter states that from ``a case rate 
reimbursement perspective,'' grouping such a ``treatment-resistant'' 
population with the rest of the general acute care population is highly 
inappropriate. Two commenters asserted that even when adjusted for 
HCOs, acute care hospitals are not designed or intended to provide 
service to long-term care-type patients. The commenters emphasized that 
acute care hospitals are not designed to provide extended care 
services, unlike LTCHs, with their specially trained expert staff and 
clinicians and multi-disciplinary approaches. LTCHs, noted one 
commenter, are like acute care

[[Page 27857]]

hospitals but must sustain a high level of care for longer periods.
    Response: Under this fourth payment option, as the LOS increases, 
the payment for such cases under the LTCH PPS will be based on a 
decreasing percentage of an IPPS-comparable per diem amount and an 
increasing percentage of the LTC-DRG per diem payment amount. We 
believe that this payment adjustment recognizes the particular 
expertise of LTCHs treating a population who require long-term care 
because the payment percentage based on the 120 percent of the LTC-DRG 
per diem amount increases (and the payment percentage based on the 
IPPS-comparable per diem amount decrease) as the patient LOS increases. 
However, we do not agree with the statement that ``acute care hospitals 
are not designed to provide extended care services'' such as is the 
care provided in LTCHs. Although there may be communities with LTCHs 
where the acute care hospitals may have functionally ``restricted'' 
their services because of the presence of these LTCHs, as well as the 
financial advantages and clinical niche that they have sought to fill, 
acute care hospitals are equipped to provide services to the same 
population, and the IPPS under which they are paid, is calibrated based 
on the resources needed to treat those patients. Moreover, because 
there are over 3,500 acute care hospitals and approximately only 400 
LTCHs, which are not distributed uniformly throughout the U.S. (for 
example, few are located in California), many acute care hospitals are 
providing care for the vast majority of Medicare beneficiaries 
requiring the type of care described by the above commenters. Our FY 
2005 MedPAR files indicate that 20 percent of cases treated at acute 
care hospitals nationwide have lengths of stay between 7 and 14 days 
(that is, 2,386,057 out of a total of 11,855,205 cases). Additionally, 
5.2 percent of acute care hospital cases (617,219) or have LOS greater 
than 14 days. We believe, that in those acute care hospitals, to 
paraphrase the final commenter, those patients are receiving in an 
acute care hospital paid under the IPPS, the ``high level of care for 
longer periods,'' they would also receive as patients at an LTCH.
    Comment: Several commenters claimed that we based our proposed 
revision of the SSO policy that could have resulted in an IPPS-
comparable payment for a particular SSO case, on the incorrect 
assumption that ``short stay'' LTCH patients are clinically similar to 
short term acute care hospital patients. They assert that the SSO 
thresholds (\5/6\ of the geometric ALOS for each LTC-DRG) were never 
meant to be a measure of the appropriateness of an LTCH admission, but 
rather, were mathematically derived from the per diem payment amounts, 
which were based on a methodology that would produce a payment-to-cost 
ratio for SSO cases close to one. Furthermore, one commenter states the 
presence of a SSO patient does not indicate a premature discharge from 
an acute care hospital, citing that at this commenter's LTCHs, 11 
percent of the patients had previously qualified as HCOs at the 
referring acute care hospital. Additionally, the commenters asserted 
that we are mistaken in its claim that LTCHs can foresee the LOS for 
patients admitted to LTCHs or predict likely deaths, where in 
actuality, upon admission, there is generally no substantial clinical 
difference between long stay and ``short stay'' patients. Commenters 
found it to be incongruous that a patient in LTC-DRG 475 (Respiratory 
System Diagnosis with Ventilator Support) would still be an SSO patient 
(for example, 28 days for LTC-DRG 475) and could be hospitalized in an 
LTCH for greater than 25 days (the definition of an LTCH). A case such 
as this could be appropriately treated in a LTCH. The commenters noted 
that physicians cannot and should not be asked to predict the LOS or 
the likely death of severely ill patients. Commenters further asserted 
that we have made an erroneous assumption that LOS equates to 
``severity of illness'' (SOI) and is a proxy for the appropriateness of 
an admission. However, the commenters assert that this is not the case. 
They point to another incorrect belief in the proposed rule that LTCHs 
function like acute care hospitals when they have patients for the same 
LOS. On the contrary, the commenters assert that SSO patients are being 
admitted because they look just like ``inliers,'' and we have proposed 
that LTCHs absorb payment rates that bear no relationship to the costs 
of furnishing patient care at the LTCH level.
    Furthermore, based on claims analysis, using the APR-DRGs, the 
medical complexity and mortality rates of SSO patients, as measured by 
the SOI and ``risk of mortality'' (ROM) standards are very similar to 
that of the LTCH ``inlier'' patient population. The commenters further 
presented comparisons between these measures for SSO patients and for 
patients with the same DRGs in acute care hospitals, indicating that 52 
percent of all patients admitted to LTCHs were in the highest APR-DRG 
ROM categories, whereas only 24 percent of acute care patients are in 
those same categories, resulting in a total percentage of APR-DRGs 3 
and 4 at LTCHs among the SSO population that is approximately double 
that of acute care hospitals. The commenters noted that higher patient 
acuity correlates to higher utilization of facility resources, and 
hence, higher costs, which argues against our proposed policy that 
would significantly lower reimbursements for SSO cases. Several 
commenters also provided a comparison of case mix indices (CMI) for 
LTCH SSO cases and cases at acute care hospitals. The commenters assert 
that SSOs at LTCHs have a relative CMI that parallels the CMI of LTCH 
``inlier'' cases at LTCHs and which is 72 percent higher than the 
comparable CMI at acute care hospitals.
    Response: We are well aware that not every SSO patient can be so 
identified at the time of admission to an LTCH. We further recognize 
that many patients who will eventually be defined as SSO patients 
because their LTCH stay is equal to or less than \5/6\ of the GMLOS for 
their particular LTC-DRG, may, upon admission, present the same 
severity of illness and risk of mortality as ``inlier'' LTCH patients. 
In this respect, the assertions and data presented by the commenters 
comparing the SOI and ROM based on the APR-DRGs of SSO patients to 
those of ``inliers'' were persuasive, and coupled with additional 
considerations, we revisited our proposed payment policy for SSO cases. 
We agree that SSO thresholds described by the commenters were never 
meant to be a measure of the appropriateness of an LTCH admission, but 
rather, were mathematically derived from the per diem payment amounts. 
We believe this enabled us to arrive at a reasonable payment policy at 
the outset of the LTCH PPS for cases that had lengths of stay 
significantly shorter than those patients fitting the typical profile 
of those who should be treated at LTCHs. We recognize that an LTCH 
admission could be a medically complex one (an appropriate LTCH 
admission) with a relatively long LOS and still be considered an SSO 
case. We also acknowledge that, in some cases, LTCH admissions could 
also have qualified as HCOs at the referring acute care hospital. We 
still have concerns, however, that patients in LTC-DRGs with 
significantly shorter stays than the ALOS for that particular DRG might 
have been unnecessarily admitted to the LTCH rather than receiving all 
of their care in the acute care hospital. In addition, we are adjusting 
the LTCH PPS to appropriately pay for those stays that consume far less 
than a full array

[[Page 27858]]

of services in the LTCH for the particular LTC-DRG.
    We believe this to be the case since our data indicates a 
correlation between the LOS at an acute care hospital for a patient 
following treatment at the highest level of intensity (ICU or CCU), 
that is, the number of ``recuperative'' days, and whether or not the 
patient was admitted to an LTCH upon discharge from the acute care 
hospital. As Table 11 indicates, an analysis of the CY 2004 MedPAR 
files revealed that for the specified DRGs for acute care cases 
following ICU/CCU days, there were significantly fewer ``recuperative'' 
days for acute care HCO patients that were discharged and admitted to 
an LTCH than for those patients that were discharged directly from the 
acute care hospital. For acute care cases in DRGs 475 (Respiratory 
system diagnosis with ventilator support) and DRG 483 (Trach with 
mechanical vent 96+ hours or PDX except face, mouth and neck 
diagnosis), the number of ``recuperative'' days were considerably 
shorter at the acute care hospital if there was a discharge followed by 
an admission to an LTCH. We believe that this data confirms MedPAC's 
assertion in the June 2004 Report to the Congress that ``patients who 
use LTCHs have shorter acute hospital lengths of stay than similar 
patients'' (p. 125).

                         Table 11.--LOS, ICU/CCU LOS, and Post-ICU/CCU LOS for Selected Inpatient DRGs by Post-Discharge Status
                                                                 [Live discharges only]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Acute                                                                  High Cost Outlier
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Inlier                                     Outlier
                               DRG                                  Cases       LOS      ICU/CCU   Post ICU/    Cases       LOS      ICU/CCU   Post ICU/
                                                                                           days     CCU days                           days     CCU days
--------------------------------------------------------------------------------------------------------------------------------------------------------
475--no LTCH....................................................     65,937       10.5        6.4        4.1      3,887       32.5       20.5         12
475--LTCH.......................................................      3,286       12.5        9.5          3        515       29.6       22.6          7
483--no LTCH....................................................     11,726       31.5       21.8        9.7      3,257       73.6       53.6         20
483--LTCH.......................................................      8,920       26.6       23.3        3.3      2,353       45.7         41        4.7
001--no LTCH....................................................     22,174          9        4.2        4.8      1,271       29.2       16.9       12.3
001--LTCH.......................................................        477       13.4        8.2        5.2        125         29       21.8        7.2
014--no LTCH....................................................    216,972        5.5        1.7        3.8      1,257       28.1       13.5       14.6
014--LTCH.......................................................      3,145        7.9        3.5        4.4        108       24.2       16.9        7.3
148--no LTCH....................................................    117,537       10.5        2.4        8.1      6,552       33.5       14.5         19
148--LTCH.......................................................      1,623         16        6.3        9.7        763       31.7       17.9       13.8
012--no LTCH....................................................     53,838        5.2        0.7        4.5        294       27.7        9.6       18.1
012--LTCH.......................................................        329        6.8        1.4        5.4         11       20.8       11.5        9.3
087--no LTCH....................................................     68,976        6.5        2.1        4.4        476       29.9         14       15.9
087--LTCH.......................................................      1,192        9.3        4.4        4.9         37       24.7       15.1        9.6
079--no LTCH....................................................    139,412          8        1.3        6.7      1,429         34        9.3       24.7
079--LTCH.......................................................      2,543         10        2.7        7.3         73       30.5       10.5         20
088--no LTCH....................................................    387,285        4.8        0.8          4        501         30        9.3       20.7
088--LTCH.......................................................      2,474        7.3        2.1        5.2         32       30.4         13       17.4
089--no LTCH....................................................    488,931        5.6        0.9        4.7      1,067       27.9        8.8       19.1
089--LTCH.......................................................      2,999          8        2.2        5.8         53       29.2       13.5       15.7
416--no LTCH....................................................    194,850        7.4        1.6        5.8      3,660       28.7       13.3       15.4
416--LTCH.......................................................      3,749        9.7        3.8        5.9        390       25.6       18.1        7.5
482--no LTCH....................................................      4,841        9.8        3.3        6.5        241       35.2       14.9       20.3
482--LTCH.......................................................        145         13        6.5        6.5         31       33.3       21.8       11.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We further agree that some SSO patients become so by virtue of 
death or a faster than expected recovery and early discharge, and that 
in certain LTC-DRGs, the SSO threshold still requires a relatively long 
hospital stay (for example, DRG 475, Respiratory System Diagnosis with 
Ventilator Support). However, in the absence of better admission 
criteria, we still are concerned that LTCHs are admitting some SSO 
patients that could have received their full care at the acute care 
hospital and/or SNF level facility.
    However, we do not agree with two comparisons made by a 
considerable number of the commenters concerning the SOI and ROM of 
LTCH SSO patients to those of acute care patients based on similar 
lengths of stay and case-mix indices. Although we will not be 
finalizing the specific proposed SSO payment policy option that the 
commenters were opposing, we believe that it is essential to evaluate 
the basis of these last comparisons.
    These commenters submitted data indicating that even though they 
may be inpatients grouped to the same DRG, for the same number of days, 
a SSO patient at a LTCH is much sicker and has a greater chance of 
dying than does the acute care patient. Although we will not be 
finalizing the specific proposed SSO payment policy option that the 
commenters were opposing, we believe that it is essential to evaluate 
the basis of these last comparisons.
    Generally, even a patient in an appropriate LTCH admission that has 
been previously hospitalized in an acute care hospital received the 
diagnostic work up and major interventional treatment during that 
initial stay. Assuming that the patient continued to need hospital-
level care after being somewhat stabilized and was discharged to a 
LTCH, the discharge to a LTCH could have been determined as clinically 
appropriate. The clinical status of this patient at this point cannot 
be reasonably compared to a typical patient who is treated in the acute 
care hospital and who is grouped to the same DRG. This is the case 
because the original patient has already been treated at that initial 
level and has required additional hospital-level care either by 
remaining at the acute care hospital, which would be paid for under the 
IPPS (perhaps as a HCO), or by being admitted to a LTCH where the stay 
could either be a SSO or an ``inlier.'' The only valid comparison of 
the SOIs and ROMs of two such patients in the context of the 
commenter's concerns,

[[Page 27859]]

would be to contrast the SOI and ROMs of the patient at the LTCH with 
the patient who, following the same initial intervention at the acute 
care hospital, continued treatment at the acute care hospital.
    We understand that the proposed option that could have resulted in 
paying for a SSO stay based on the IPPS-comparable amount would have 
resulted in significant payment reductions to LTCHs for all SSO cases, 
even those that by all clinical measures could be considered 
appropriate LTCH patients. However, we still believe that modifications 
to the SSO policy are necessary to ensure that payments for those cases 
appropriately reflect the resources necessary to treat those patients, 
which we believe are not the same as the resources necessary to treat a 
patient requiring the full level of care available at a LTCH, with 
lengths of stay over the SSO threshold for the LTC-DRG. At the outset 
of the LTCH PPS, we established the SSO payment adjustment to address 
this distinction which we continue to believe is a valid and reasonable 
consideration for Medicare payments to LTCHs (67 FR 55995, August 30, 
2002).
    We believe that the finalized payment policy for SSO cases, 
described above, responds to the concerns stated by these commenters. 
That is, since LTCHs are certified as acute care hospitals that are 
distinguished, by virtue of their greater than 25-day ALOS, for 
Medicare payments under the LTCH PPS, per discharge payments are based 
upon the high utilization of resources and long stays generally 
associated with a specific type of patient. Therefore, we will be 
paying SSO patients based on the least of 100 percent of the estimated 
costs, 120 percent of the LTC-DRG per diem multiplied by the LOS, the 
full LTC-DRG payment, or a blend of the IPPS comparable per diem 
payment amount capped at the full IPPS comparable payment amount and 
the 120 percent of the LTC-DRG per diem payment amount. (The specifics 
of this option are detailed in responses above.) We believe that this 
option is both fair and reasonable because as the length of a SSO stay 
increases, the case begins to resemble a LTCH stay that requires the 
full resources of a LTCH, as we believe was envisioned by the Congress 
when they crafted the statutory definition of a ``subclause (I)'' LTCH, 
``a hospital which has an inpatient LOS (as determined by the 
Secretary) of greater than 25 days'' in section 1886(d)(1)(B)(iv)(I) of 
the Act, and thus, is more appropriate for payment under the LTCH PPS. 
As noted above, LTC-DRG weights and payment rates under the LTCH PPS 
have been calculated to reflect services delivered to Medicare 
beneficiaries with complex medical conditions that result in a greater 
use of hospital resources, long inpatient stays, and significantly 
higher Medicare payments.
    It remains a significant concern, however, that in some cases LTCH 
admissions are encouraged and facilitated by the referring acute care 
hospital to reduce the acute hospital LOS, rather than on the basis of 
objective LTCH admission criteria leading to higher numbers of SSO 
patients inappropriately admitted to LTCHs. (For this reason, we have 
awarded a contract to RTI, discussed in section XII of this final rule, 
for the purpose of evaluating the feasibility of establishing such 
objective criteria.) We are also concerned that in areas where LTCH 
beds are plentiful, the ALOS data indicates that physicians may be less 
likely to adhere to objective LTCH admission criteria to reduce acute 
care hospital LOS and also to achieve a satisfactory patient 
disposition, neither of which are the intended functions of LTCHs.
    Comment: Many commenters asked that we not finalize the proposed 
SSO policy revisions, stating that the SSO payment option that could 
pay the LTCH based on an amount comparable to what would otherwise have 
been paid under the IPPS was not based on solid data analysis and 
supportable conclusions. In fact, a number of commenters asserted that 
the proposed policy was not based on data but rather on ``erroneous and 
unsubstantiated assumptions'' that all SSO patients are inappropriately 
admitted to LTCHs and inappropriately discharged from acute care 
hospitals. The commenters noted that, because of the way in which the 
policy was formulated, the percentage of LTCH cases that are paid under 
the SSO payment policy was a function of the SSO threshold and the 
dispersion of cases above and below the ALOS for the LTC-DRGs, that is, 
statistically, the SSO definition at \5/6\ of the geometric ALOS would 
necessarily produce approximately 37 percent of cases as SSOs. 
Therefore, under the commenters belief that given the regulatory \5/6\ 
definition of SSOs, which we had not proposed to change, the percentage 
of SSO cases was not amenable to change just based upon LTCHs admission 
policies. One commenter noted that for a significant number of patients 
to fall below \5/6\ ALOS for a LTC-DRG is expected in a LTCH. 
Additionally, commenters noted that a case may qualify as a SSO because 
the patient has run out of covered days, regardless of the actual LOS 
in the LTCH and that in establishing our policy for qualifying as a 
LTCH (that is, meeting the average greater than 25 day LOS for a 
particular cost reporting period), we have recognized the 
``appropriateness'' of including ``total'' rather than just ``covered'' 
days of a stay, since regardless of the payer, if the patient is still 
receiving hospital-level care, the facility is functioning like a LTCH. 
For this reason, these commenters urged us to remove such cases from 
the calculations we used to develop a SSO payment policy. Some 
commenters expressed concerns about the reliability of the data that 
underlay our policy proposals and asserted that our proposals are based 
on faulty assumptions, insufficient data, and a fundamental lack of 
understanding of the valuable care LTCHs provide. Moreover, the 
commenters assert that LTCH patients are just not the same type of 
patients as acute patients; they believe that our proposed policies 
indicate that we are unaware of the distinction between acute care 
patients and patients at LTCHs. They further claim that they did not 
believe that the public was able to submit meaningful comments to our 
proposed policies because of our data flaws, our biases, and the 
resulting policies that we proposed.
    Response: As stated in the previous response, we believe that we do 
have a thorough understanding of the types of cases in which LTCHs 
specialize but we are also aware that the vast majority of LTCH 
patients are admitted following treatment at acute care hospitals. The 
patient's stay at the acute care hospital generated a Medicare payment 
under the IPPS, and the subsequent admission to a LTCH, an acute care 
hospital with an ALOS of greater than 25 days, will generate an 
additional Medicare payment. To protect the Medicare Trust Fund from 
what may be inappropriate and/or unnecessary payments, and to ensure 
that the program is not paying twice for the same episode of care, we 
feel that it is essential that we evaluate those cases that are 
admitted for an unusually short stay following an initial treatment at 
another acute care hospital to acute care hospitals that specialize in 
long-stay care, since that second stay will trigger another Medicare 
payment. In MedPAC's June 2004 Report to the Congress, the Commission 
stated that, ``* * * Living near a LTCH increases a beneficiary's 
probability of using such a facility. For example, living in a market 
area with a LTCH quadruples the probability of LTCH use. Being 
hospitalized in an acute hospital with a LTCH located within the 
hospital also

[[Page 27860]]

quadruples the probability that a beneficiary will use a long-term care 
hospital'' (page 125).
    Although we acknowledge that our establishment of the \5/6\ of the 
geometric ALOS threshold, from a statistical standpoint, will result in 
approximately 37 percent of LTCH cases being defined as SSOs, we are 
still extremely concerned with the number of cases that are being 
treated in LTCHs that fall considerably below the geometric ALOS for 
any given LTC-DRG. In fact, as stated previously, in the commenters 
various and specific suggestions for how to reasonably and fairly pay 
SSOs, the commenters themselves drew a distinction between those cases 
that fall within the definition of a SSO but are more in keeping with 
the LOS generally associated with a LTCH (for example, a case assigned 
to LTC-DRG 482 with SSO threshold of 32.1 days, would still be paid as 
a SSO if the patient was treated in the LTCH for 25 days) and those 
cases that many commenters referred to as ``Very Short Stay Outliers 
(VSSO)'' or ``Very Short Stay Discharges (VSSD).'' In the finalized SSO 
policy, described elsewhere in these responses, the payment formula 
particularly takes into account our very strong belief that LTCHs are 
acute care hospitals that specialize in treating patients requiring 
``long-stay'' hospital-level care. The LTCH PPS has been designed and 
calibrated to pay specifically for that type of care. Since the 
inception of the LTCH PPS, when we established the SSO adjustment (67 
FR 5594 through 55995, August 30, 2002) under our payment regulations 
at Sec.  412.529, we have provided that if a LTCH treats patients not 
requiring a long stay, Medicare pays the LTCH based on the applicable 
payment adjustment option, described above. Furthermore, as we revise 
the payment options in this final rule for the SSO policy, we continue 
to believe that such a payment adjustment is reasonable for all short 
stay patients, including those that die shortly after their admission 
to the LTCH. The FY 2004 MedPAR data indicates that 43 percent of all 
patients that die in LTCHs are deaths that occur within the first 14 
days of the stay, with 35 percent of SSO deaths occurring within the 
first 7 days following admission. As we have since the inception of the 
LTCH PPS, we continue to believe that Medicare payments for those death 
cases occurring within the SSO threshold should be determined under the 
SSO policy since the length of the patient's treatment in the LTCH did 
not utilize the full measure of hospital resources for which the full 
LTC-DRG payment was calibrated.
    Conversely, our data indicates that of all SSO cases, approximately 
60 percent of the discharges are 14 days or less and also that acute 
care hospitals treat a significant percentage of patients for longer 
than the 5 day ALOS. (In acute care hospitals, paid under the IPPS, 
over 20 percent, in the aggregate, of patients that are treated have a 
LOS of between 14 and 7 days.) Therefore, as described below, we 
believe that the SSO policy that we are finalizing under the LTCH PPS 
provides a fair and reasonable payment, in light of the above stated 
concerns that the short-term hospital-level care that LTCHs provide for 
many SSO cases may be substituting for care that could otherwise be 
delivered at acute care hospitals and for which at best, Medicare would 
otherwise pay under the IPPS.
    Under the new option of our finalized policy, we recognize that, as 
the length of a SSO stay increases, the case begins to more resemble a 
more ``typical'' LTCH stay and therefore, it is more appropriate for 
payment to reflect the amount otherwise payable under the LTCH PPS. 
Therefore, we will pay the lesser of 100 percent of the estimated costs 
for the discharge, 120 percent of the per diem of the LTC-DRG 
multiplied by the LOS, the full LTC-DRG payment, or a blend of the IPPS 
comparable per diem payment amount capped at the full IPPS comparable 
payment amount, and 120 percent of the LTC-DRG per diem payment amount. 
For each day, as the LOS increases, the percentage of the IPPS-
comparable per diem amount will decrease and the percentage based on 
the 120 percent of the LTC-DRG specific per diem amount will increase. 
Because the formula uses the IPPS-comparable per diem amount, capped by 
the full IPPS-comparable amount, for cases with very short lengths of 
stay (that is, less than the IPPS ALOS), the IPPS-comparable amount 
portion of the blended payment amount would be less than the full IPPS 
comparable payment amount. Mathematically, as the LOS reaches the lower 
of the \5/6\ SSO threshold or 25 days, the payment under the fourth 
option, the blend (that is, zero percent of the IPPS comparable per 
diem amount added to 100 percent of the 120 percent LTC-DRG per diem 
amount) will be equal to the 120 percent of the LTC-DRG per diem 
amount.
    Under the LTCH PPS at Sec.  412.507 Medicare will pay for inpatient 
care delivered only on those days that the beneficiary has coverage 
until the LOS exceeds the SSO threshold and becomes an inlier stay. 
Therefore, since the inception of the LTCH PPS for FY 2003, we 
established the distinction between ``covered days'' and ``total days'' 
of a LTCH stay. At the point when a patient's benefits exhaust, the 
patient is ``discharged for payment purposes'' and even though the 
patient may continue to be hospitalized at the LTCH, Medicare will pay 
only for the covered days, with the patient (or the patient's secondary 
insurance) being responsible for the remaining days' LTCH costs. For 
example, even though a patient could have been treated in an LTCH for 
40 days, if upon admission, the patient only had 20 covered days 
remaining, for Medicare payment purposes, the stay could qualify as a 
SSO, unless the 20 covered days exceeded the \5/6\ threshold for the 
LTC-DRG to which the case was grouped, at which point, the stay would 
become an inlier stay and a full LTC-DRG payment would be generated. 
Several commenters urged us to remove SSO cases occurring as a result 
of such lapses of Medicare coverage from our revised SSO policy but 
based on our data analysis, we will not be excluding benefit exhausted 
cases from the policy. According to FY 2005 MedPAR data, these cases 
constitute only 3.31 percent of SSO cases. It has been our policy since 
the beginning of the LTCH PPS to count those stays during which 
benefits are exhausted as SSOs if the covered portion of the stay is 
less than \5/6\ of the geometric ALOS for the DRG. In this way, we 
appropriately determine payment based on the part A-covered stay. At 
the same time, we continue counting the total days of the stay for 
purposes of qualification as a LTCH, because that calculation is 
intended to reflect the length of care provided to Medicare 
beneficiaries. Our policy, however, of including total days for 
Medicare patients to identify hospitals qualifying (or continuing to 
qualify) as LTCHs indicates our recognition that conceivably, a 
beneficiary may be appropriately treated in a LTCH for example, for 40 
days, and yet because the beneficiary had only 5 remaining benefit 
days, would be reported in our claims data as a 5-day SSO case. We 
would be interested in revisiting this issue and would solicit comments 
to that end. For the present, however, since, as noted above, a very 
small percentage of SSO cases are caused by beneficiaries exhausting 
benefits, the above discussed benefits exhaust cases will continue to 
be governed by the finalized SSO policy.
    As stated above previously in this section, although we are not 
finalizing the proposed SSO payment policy, we will address the 
commenters concerns

[[Page 27861]]

questioning the integrity of the data upon which we based our proposed 
policy for the IPPS-comparable option to payments under the SSO policy 
and who also took great issue with our explanations for the proposed 
policy. We believe that the commenters' concerns actually arose from 
the anticipated impact of the proposed policy on their LTCHs, since the 
issue of the major impact, an estimated 11 percent decrease in, an 
aggregate payment, was the underlying concern raised by most 
commenters, rather than actual doubts about the accuracy of our data. 
We disagree that the public was denied the opportunity for meaningful 
comment on our proposed policies, as we will discuss below. Further, we 
believe this RY 2007 regulation cycle for the LTCH PPS actually 
presents an excellent example of a rule-making experience as envisioned 
by the Administrative Procedures Act, and the Secretary's general rule-
making authority as established under section 1871(b)(2) of the Act, as 
well as demonstrating our responsiveness to public comment on proposed 
policies. Reacting to several of the proposed provisions in the RY 2007 
LTCH PPS proposed rule (71 FR 4648), industry stakeholders engaged 
consultants, including the Lewin Group and Avalere Health LLC, that re-
analyzed our data used in the development of our proposed policy, as 
well as our specific policy proposal for revision to SSO policy. Their 
reports and findings were submitted to us along with the industry's 
comments on the proposed rule and the reports were frequently quoted by 
other commenters. As noted throughout these responses, based upon the 
comments and serious proposals that we received (which are listed 
above), as well as other information that was provided by stakeholders, 
we revisited the proposed policy and in response to those concerns, 
have, in fact, not finalized those aspects that the commenters found 
the most troubling.
    Therefore, rather than stakeholders being prevented from submitting 
meaningful comments on the policies in the RY 2007 LTCH PPS proposed 
rule, the actual sequence leading up to the finalized payment option 
under the SSO policy, exemplifies the objectives of notice and comment 
rule-making. As noted above, the resulting comments, have had a 
significant impact on our revisiting and revising the proposed policy.
    Comment: Two commenters suggested that rather than challenging the 
cases that are admitted from acute care hospitals, we should be more 
concerned about inappropriate admittances from non-hospital settings 
such as SNFs or elsewhere.
    Response: In response to the commenters' suggestion that we review 
inappropriate admittances from non-hospital settings, after analyzing 
recent data, we note that approximately 80 percent of the patients 
admitted to the LTCHs come from the short term acute-care hospitals and 
only 20 percent are admitted from other non-hospital settings. Since 
SNFs do not offer hospital-level care but are still dealing with 
patients with compromised health, we believe that generally, a decision 
to transport a SNF patient to a hospital, would generally be made 
because the patient appears to the medical professionals at the SNF to 
be in need of a higher level of medical treatment or care than is 
available at the SNF. (In fact, such patients would typically be 
admitted to the acute care hospital rather than to a LTCH.) However, 
both an acute-care hospital and a LTCH offer acute hospital-level care. 
As discussed above, we are very concerned about the treatment of a 
short-stay patient who could reasonably and effectively continue to be 
treated in an acute-care hospital and paid for under the IPPS, being 
admitted unnecessarily to a LTCH, which specializes in treating 
patients requiring long-term hospital-level care and paid for under a 
PPS which has been calibrated based upon the high resource use 
associated with long patient stays. Furthermore, admission of such a 
patient could also result in an unnecessary and inappropriate LTCH 
hospitalization, which would also result in a second Medicare payment 
for what was essentially, one episode of care.
    Comment: Several commenters stated that although CMS claimed it had 
insufficient data for a one-time adjustment to the standard Federal 
rate, and proposed a postponement of this evaluation and potential 
policy implementation, we asserted that we had sufficient data when we 
proposed the payment revision to the SSO policy. The commenters believe 
that if we have insufficient data for the purposes of determining the 
former policy, we have insufficient data for the major policy change 
signified by the proposed SSO payment policy revision. The commenters 
stated that when comparing data from FY 2003 to FY 2004 for SSO cases, 
there was a decrease of SSO cases from 48 percent in FY 2003 to 37 
percent in FY 2004. Since FY 2004 was the second year of the transition 
to full payments under the LTCH PPS and LTCHs were paid using a blend 
(that is, 60 percent of payments were based on what would have been 
paid under the reasonable cost-based (TEFRA) methodology), commenters 
stated that the payment policy incentives we built into the PPS, which 
were designed to discourage short stay patients, would not have been 
reflected in FY 2004 data. Therefore, several commenters urged that we 
reexamine the number of SSOs at the end of the transition or not before 
reviewing FY 2005 data which is the first year that more than 50 
percent of each LTCH PPS will be based on the Federal rate and impacted 
by the SSO payment criteria. The commenters maintained that we will 
only be able to determine whether the current SSO payment methodology 
is fair after we compare more than one year of cost reporting data post 
transition, a valid analysis of facility characteristics and resources 
of LTCHs to acute care hospitals for the same DRGs.
    Response: We do not believe that the position we have taken in 
these two policy areas, establishing a revised payment option for SSO 
cases and postponing the one-time adjustment to the standard Federal 
rate is inconsistent. Rather, these proposals are based on two 
different data sources that have different collection procedures and 
different analytic potentials. We believe, for reasons explained below, 
that the changes that we have made to the payment options for SSO 
discharges are based on credible and sufficient data even though the 
transition period to full payments under the Federal rate specified in 
Sec.  412.533 is not yet complete. The data, which we utilized when we 
designed the SSO policy at the outset of the LTCH PPS for FY 2003 
(which is the basis for the 48 percent figure of the ``base year'' SSO 
cases) was based on LTCH data generated during FY 2001 when LTCHs were 
still being paid under the TEFRA system. Notwithstanding providing for 
a 5-year transition and our earlier projections that in FY 2003 
payments would be more generous under the blend (that is, we believed 
that 49 percent would opt for the blend, whereas 51 percent would opt 
for full Federal payments), the DRG-based per discharge payments under 
the LTCH PPS provided an incentive so that, based on the data used in 
the RY 2005 LTCH PPS final rule from the Provider Specific File at the 
close of CY 2003, in fact, we estimated that 93 percent of LTCHs would 
be paid fully under the LTCH PPS for RY 2005 (69 FR 25701, May 7, 
2004). We believe that this indicates LTCH behavior at that point, 
which was in the middle of the second year of the 5-year transition, 
was being shaped by the incentives associated with all aspects of the 
LTCH

[[Page 27862]]

PPS, from more accurate coding of LTC-DRGs, to the graduated payments 
under the SSOs, as well as to the financial advantages inherent in 100 
percent payment under the Federal rate. Furthermore, for purposes of 
evaluating patient-level data, we use the MedPAR claims files which are 
updated quarterly. Therefore, for FY 2004, using the best available 
data for the RY 2007 LTCH PPS proposed rule, we were able to determine 
that based on 118,525 cases from 337 LTCHs, 10,530 discharges have 
lengths of stay of 7 days or less; 16,411 of 8 to 14 days; 36,989 of 15 
to 25 days; and 54,595 of greater than 25 days. When we evaluated SSO 
data, therefore, we did not base either the proposed revision of the 
SSO policy or the finalized policy on isolated data. Rather, we 
compared the data from FY 2001, which was used to formulate the LTCH 
PPS, and the most recent available LTCH PPS discharge data available at 
that time (that is, FY 2004).
    At the outset of the LTCH PPS, we established a monitoring 
component (discussed in section XI. in this preamble of this final 
rule) which operates continually under the direction of our Office of 
Research, Development, and Information (ORDI) and provides us with data 
analysis and policy input. We will continue to monitor all aspects of 
the LTCH PPS, including the SSO policy, particularly in light of the 
finalized changes that we are making for RY 2007, focusing on the 
impact of our revisions on LTCH behavior. As we noted in the RY 2007 
LTCH PPS proposed rule, we would use the conclusion of the 5-year 
transition (FY 2007) as a benchmark and for any adjustment under the 
one-time adjustment in RY 2008. We plan to conduct a comprehensive 
analysis of all of the payment adjustment policies, including our SSO 
policy, issued at the inception of the LTCH PPS for FY 2003. This 
payment analysis would be conducted to evaluate whether significant 
revisions would be appropriate. Moreover, the analysis of cost reports, 
and patient and facility characteristics mentioned by some of the 
commenters were evaluated as part of the RTI study (which we expect to 
be submitted in final form later this year) discussed in section XII of 
this preamble.
    The proposal to postpone the one-time potential adjustment to the 
standard Federal rate is addressed in greater detail elsewhere in these 
responses. However, we note that the data source for such an evaluation 
would be LTCH cost reports (CMS HCRIS files) and, given that a LTCH is 
permitted to submit its cost report within 6 months of the end of the 
cost report period, plus the lag time required for typical cost report 
settlement involving submission, desk review, and in some cases, 
auditing, we did not believe that the October 1, 2006 deadline was 
reasonable particularly in light of the potential significance of any 
adjustment. Accordingly, we believe that in the context of the need to 
make adjustments that will be based on cost report data, it is accurate 
to state that the necessary data are not yet available. However, in the 
context of the SSO change which is based, in part, on the LOS data 
which are derived from claims information from the MedPAR files, those 
data are currently available, and therefore, it is appropriate to 
finalize that change based on existing data.
    Comment: Several commenters suggested that prior to finalizing the 
changes to the SSO policy specified in the RY 2007 LTCH PPS proposed 
rule, we should first evaluate the impact of the 25 percent rule which 
was based on many of the concerns that we expressed regarding movement 
of patients prematurely from acute care hospitals to LTCHs.
    Response: The regulation that the commenters refer to is ``Special 
payment provisions for long-term care hospitals within hospitals and 
satellites of long-term care hospitals'' which was implemented for 
October 1, 2004, and which focused on high percentages of patients 
being admitted to LTCH HwHs and satellites of LTCHs from host acute 
care hospitals and which specified payment adjustments, in general, for 
discharges in excess of 25 percent. We believe the SSO policy is not 
related to the special payment provisions for long-term care HwHs and 
satellites of LTCHs which was implemented for October 1, 2004, and 
which focused on high percentages of patients being admitted to LTCH 
HwHs and satellites of LTCHs from host acute-care hospitals and which 
specified payment adjustments, in general, for discharges in excess of 
LTCH 25 percent. The SSO policy addresses the appropriate payment 
formula for patients with lengths of stay significantly below the 
average for LTCHs patients in that LTC-DRG. Therefore, we see no 
connection between the two policies and we believe that it is 
unnecessary to postpone modifications to the SSO policy.
    Comment: A few commenters questioned whether we had considered the 
impact of the expanded post-acute transfer rule in formulating the 
proposed changes in the SSO policy.
    Response: The expanded post-acute care transfer policy, which was 
finalized in the FY 2006 IPPS final rule (70 FR 47411), affects DRGs 
that have a high volume of discharges to post-acute care facilities and 
a disproportionate use of post-acute care services. The purpose of the 
policy is to avoid providing an incentive for a hospital to transfer a 
patient to another hospital early in the patient's stay to minimize 
costs while still receiving the full DRG payment. Although we expect 
that policy to have some impact on the discharge behavior of acute care 
hospitals because the expanded policy will reduce payments to acute 
care hospitals, under the IPPS, for discharges prior to reaching the 
geometric ALOS for one of the included DRGs, it does not necessarily 
affect the issues being addressed by the SSO policy change. Both of 
these policies are ensuring that Medicare payments are appropriate 
given the types of treatment provided in each setting. We believe that 
the revised payment formula for SSO patients that we are finalizing 
will appropriately pay LTCHs for delivering services to patients who do 
not otherwise require the lengths of stay that are characteristic of 
LTCHs. The SSO policy will address payments to LTCHs for patients 
discharged from the acute care hospital even after the geometric ALOS.
    Comment: Several commenters believe that we are incorrect that 
LTCHs could be admitting patients not requiring long stays, noting that 
LTCHs actually have a disincentive to admit short stay patients because 
LTCH certification status can be at risk if the hospital does not 
maintain an ALOS of more than 25 days.
    Response: Under the TEFRA system, all inpatient days (whether 
covered by Medicare or not) were included in the LOS computation, and 
the mathematical determination was based upon the number of patient 
days--during the cost reporting period when they occurred--divided by 
discharges occurring during that same period of time (67 FR 55954, 
55971). With the establishment of the per discharge LTCH PPS, we 
restricted the patient count for purposes of qualifying as a LTCH 
solely to Medicare patients (67 FR 55971), and we implemented the 
policy of ``days following the discharges,'' under which, if a 
patient's stay crosses two cost reporting periods, the total days of 
that stay (both covered and non-covered days) would be included in the 
computation during the cost-reporting period that the discharge 
occurred (69 FR 257405, May 7, 2004).
    Our data reveals that the general ALOS of most LTCHs varies only 
slightly. Generally, LTCHs maintain an ALOS that is just over 25 days, 
meeting the statutory definition of a LTCH, that

[[Page 27863]]

is, having an ALOS of greater than 25 days. Furthermore, we understand 
that LTCHs closely monitor their yearly ALOS and that one extremely 
long-stay case can mathematically offset for a number of short-stay 
cases. From studying the hospital-specific data, we believe that this 
is indeed the case for many LTCHs. We also believe that the payment 
policy that has been utilized since the start of the LTCH PPS for FY 
2003 has not operated as a financial disincentive for the admission of 
patients who will not ultimately require long-stay hospital-level care. 
In fact, we note that our data shows approximately 27,000 SSO cases 
with a LOS of 14 days or less. This indicates that even with over 20 
percent of their discharges having such a short ALOS, LTCHs have 
maintained their greater than 25-day statutory ALOS. Therefore, we 
believe that it is both possible for a LTCH to maintain its designation 
and also admit many very short stay cases.
    Comment: We received comments requesting that we exempt subclause 
(II) LTCHs from the proposed changes to payments for SSO cases, which 
under our proposed regulation would be subject for cost reporting 
periods beginning on or after October 1, 2006. Because of the unique 
mandate established by the Congress for these LTCHs, the commenters 
believe that our proposed policy directly threatens the financial 
integrity of subclause (II) LTCHs. The commenter noted that for FY 
2004, we established a specific exception to the existing SSO policy 
because they presented data that indicated that over 50 percent of 
their patients would qualify as SSOs because of the Congress' 
delineation of their unique census and mission. Therefore, the 
commenter states, subclause (II) LTCHs cannot control either case mix 
or LOS and most of our concerns about SSOs would be inapplicable to 
such LTCHs because of this category of facility's unique services and 
programs.
    Response: By enacting section 4417(b) of the BBA, and providing an 
exception to the general definition of a LTCH as set forth in section 
1886(d)(1)(B)(iv)(I) of the Act, the Congress recognized the existence 
and importance of a distinct category of LTCHs that might not otherwise 
warrant exclusion from the acute care inpatient PPS under subclause 
(I). Under this provision, which we implemented at Sec.  
412.23(e)(2)(ii), to qualify as a subclause (II) LTCH, a hospital must 
have first been excluded as a LTCH in CY 1986, have an inpatient ALOS 
of greater than 20 days, and demonstrate that 80 percent or more of its 
annual Medicare inpatient discharges in the 12-month reporting period 
ending in Federal FY 1997 have a principal diagnosis that reflects a 
finding of neoplastic disease. (62 FR 46016 and 46026, August 29, 
1997.) Acknowledging the distinction between hospitals qualifying as 
LTCHs under section 1886(d)(1)(B)(iv)(I) of the Act (subclause (I) 
LTCHs), when we developed the PPS for LTCHs, we revised the greater 
than 25 day ALOS criteria to include only Medicare patients for these 
subclause (I) LTCHs. However, for LTCHs under section 
1886(d)(1)(B)(iv)(II) of the Act (subclause (II) LTCHs), no change was 
made to the methodology for calculating the LTCH's ALOS, since ``* * * 
we have no reason to believe that the change in methodology for 
determining the average inpatient LOS would better identify the 
hospitals that Congress intended to exclude under subclause (II)'' (67 
FR 55974, August 30, 2002). Consistent with existing policies that 
differentiate between subclause (II) LTCHs and subclause (I) LTCHs, we 
agree with the commenters that it is reasonable for CMS to consider 
whether or not a policy that has been designed for LTCHs designated 
under subclause (I) can reasonably and equitably be applied to a 
subclause (II) LTCH without some measure of adjustment. Moreover, in 
establishing this category of LTCHs, in effect, the Congress limited 
its potential case-mix, therein distinguishing it even further from the 
larger group of LTCHs. Since the theoretical foundations of a DRG-based 
PPS are that where the costs of one case may exceed its payment, the 
opposite is also likely to happen, and that where some types of cases 
are always very expensive for a hospital to treat, others are, in 
general, less costly, it is assumed that hospitals under a DRG-based 
system, therefore, can typically exercise some influence over their 
case-mix and their services to achieve fiscal stability. This option is 
generally not open to subclause (II) LTCHs. According to CMS claims 
data for CY 2001, at one subclause (II) LTCH, more than 93 percent of 
Medicare patients expired. Over half of the patients at this hospital 
would qualify as SSOs (97 percent of those SSOs expired), where others 
had extremely long lengths of stay.
    By establishing subclause (II) LTCHs, the Congress provided an 
exception to the general definition of a LTCH under subclause (I), and 
therein endorsed the unique mission of a particular type of hospital. 
We do not believe that the Congress intended for policies put in place 
for LTCHs described under subclause (I) to undermine the viability of a 
LTCH described under subclause (II).
    As we evaluated the SSO policy for subclause (II) LTCHs, we believe 
that a LTCH in this category may not be able to readily address the 
type of patients and the costs it incurs for those patients as would 
LTCHs described under subclause (I).
    Accordingly, we are not finalizing the specific options to the SSO 
policy published in the RY 2007 LTCH PPS proposed rule for a subclause 
(II) LTCH. We have revisited the relevant data for subclause (II) LTCHs 
attendant upon receiving the comments, and we now believe that 
retaining the existing SSO policy with the three current options to 
govern Medicare SSO payments at the beginning of their first cost 
reporting period beginning on or after October 1, 2006, continues to be 
both reasonable and equitable for subclause (II) LTCHs as well as for 
the Medicare program. Payments to subclause (II) LTCHs under the SSO 
policy, therefore, will be governed by the specific percentages and 
schedule at new Sec.  412.529(e)(2)(v). We consider the current 
adjustment under the SSO policy for LTCHs designated under section 
1886(d)(1)(B)(iv)(II) of the Act and Sec.  412.23(e)(2)(ii) to be a 
reasonable and equitable response to the particular situation of a 
subclause (II) LTCH under the LTCH PPS.
    Comment: Several commenters noted that SSO policy has been a 
feature of the LTCH PPS since the start of FY 2003, and, therefore, 
payments for care to this population based upon SSO methodology were 
anticipated in setting the standard Federal rate. The commenters stated 
that to cut SSO payments so radically at this time raises issues 
relating to the PPS's budget neutrality and to finalize the SSO policy 
without a ``material increase in payment rates for inlier cases,'' 
casts doubts on the ongoing fairness of the overall payment system.
    Response: We believe that commenters' when referring to the budget 
neutrality requirement mean a system-wide budget neutrality 
requirement. A system-wide budget neutrality requirement means, 
specifically, payments under the LTCH PPS are always estimated to equal 
estimated system-wide (that is, aggregate) payments that would have 
been made under the reasonable cost-based (TEFRA) payment methodology 
if the LTCH PPS were not implemented. We disagree with the commenter's 
claim that the SSO policy violates the statutory requirement that the 
LTCH PPS be budget neutral. We note that under section 123(a) of the 
BBRA,

[[Page 27864]]

Congress required that the Secretary develop ``* * * a per discharge 
prospective payment system for payment for inpatient hospital services 
of long-term care hospitals described in section 1886(d)(1)(B)(iv) of 
the Act (42 U.S.C. 1395ww(d)(1)(B)(iv)) under the Medicare program. 
Such system shall include an adequate patient classification system 
that is based on diagnosis-related groups (DRGs) and that reflects the 
differences in patient resource use and costs, and shall maintain 
budget neutrality.'' We have interpreted the requirement to ``maintain 
budget neutrality'' to require that the Secretary set total estimated 
prospective payments for FY 2003 equal to estimated payments that would 
have been made under the TEFRA methodology if the PPS for LTCHs was not 
implemented. It has been our consistent interpretation that the 
statutory requirement for budget neutrality applies exclusively to FY 
2003. In FY 2003, we set total estimated LTCH PPS payments for FY 2003 
equal to estimated payments that would have been made under the TEFRA 
methodology if the PPS for LTCHs was not implemented. Consequently, we 
believe that we have satisfied the budget neutrality requirement under 
the statute. Moreover, we have broad discretionary authority under 
section 123(a)(1) of the BBRA as amended by section 307(b)(1) of the 
BIPA to provide appropriate adjustments, including updates. Thus, we 
are acting within that broad authority in establishing changes to the 
SSO policy beginning in RY 2007.
    There are several reasons that we do not believe that the Congress 
intended perpetual system-wide budget neutrality. We note below, a 
partial list of those reasons. For example, a system-wide budget 
neutrality requirement that applies perpetually would affect the 
Secretary's ability to operate the prospective payment system for LTCHs 
efficiently. To illustrate, if the Secretary were to propose to adjust 
payments upward in a particular instance because he finds that payments 
are ``too low'', under a perpetual budget neutral system the Secretary 
would be forced to reduce estimated payments for other cases to fund 
the additional costs associated with the proposed adjustment. However, 
this shifting of resources may then cause payments to LTCHs for those 
cases that were being reduced to offset the proposed adjustment to then 
be inappropriately ``too low.'' We do not believe the Congress intended 
such a result for every adjustment that will be made to the LTCH PPS in 
perpetuity. Rather, as with all dynamic and evolving systems, we 
believe that based upon monitoring and the analysis of data, the 
Secretary has the discretion and obligation to formulate polices and 
establish payment adjustments that will ensure that the Secretary 
continues to pay LTCHs appropriately for beneficiary care.
    Also, we note that none of the statutory charges for the other 
prospective payment systems (for example, IPPS, SNF PPS, IRF PPS) 
require system-wide budget neutrality for perpetuity. We are not aware 
of anything unique about LTCHs or the need to establish a LTCH PPS that 
would have compelled the Congress to legislate a system that mandates 
budget neutrality in perpetuity. Consequently, we do not believe that 
in the instant case, the Congress departed from its consistent approach 
for budget neutrality and intended to create a statute which applies a 
completely different standard to the LTCH PPS.
    As noted above, we will not be finalizing the specific IPPS-
comparable payment option that we proposed for SSO cases, but rather 
have significantly modified the formula, in large part, because of our 
responsiveness to our commenters' concerns. Despite this, we have no 
reason to believe that ``inlier'' cases are being ``underpaid'' at 
LTCHs. MedPAR data from FY 2003 and part of FY 2004 indicate an 
aggregate 16.1 percent margin on LTCH inlier cases. We believe that the 
SSO policy that we are finalizing, as described in detail above, is 
reasonable and fair, and we see no additional need to increase payments 
to LTCH inlier cases as a consequence of this policy.
    Comment: We received one comment asking if we considered what would 
be the impact on the calibration of the LTC-DRG weights under the 
proposed changes in payments for SSOs.
    Response: As discussed in the FY 2006 IPPS final rule when we 
updated the LTC-DRGs and relative weights (70 FR 47336), the LTC-DRG 
relative weights were adjusted for SSOs by using the ratio of the LOS 
of the case to the geometric ALOS of the LTC-DRG and does not use the 
actual payment amount (or cost) to adjust for SSO cases in the annual 
recalibration of the LTC-DRG relative weights. Therefore, the changes 
to the SSO policy would have no impact on the LTC-DRG relative weights. 
Under the current LTC-DRG relative weight recalibration methodology, 
there is no reason for changing how the LTC-DRG relative weights are 
computed under the final SSO policy.
    Comment: A number of commenters stated that the proposed IPPS-
comparable option for payment under the SSO policy is a violation of 
the express will of the Congress in establishing the category of 
hospitals that were excluded from the IPPS under section 1886(d)(1)(B) 
of the Act. The commenters stated that under that provision the 
Congress acknowledged that these excluded hospitals (that is, LTCHs, 
IRFs, IPFs, childrens hospitals and cancer hospitals) could not 
reasonably be paid under a DRG system that had been designed to pay for 
treatment in acute care hospitals under the IPPS. Further, these 
commenters stated that we had thwarted the intentions of the Congress 
to establish a unique PPS that is specific to LTCHs in subsequent 
legislation (that is, the BBRA of 1999 and the BIPA of 2000). The 
commenters claimed that the proposed IPPS-comparable option to the SSO 
payment policy would be forbidden under these enabling statutes because 
such a payment option would ignore the ``differences in patient 
resource use and cost'' at LTCHs. One commenter criticized our use of 
the phrase ``a payment otherwise comparable to what would have been 
paid under the IPPS'' as a disingenuous attempt to side-step the 
Congressional mandate that the LTCHs not be paid based on the acute 
care IPPS. Therefore, the commenter believes that we violated the 
statutory intent that LTCHs be excluded from the IPPS in issuing the 
proposed IPPS-comparable payment adjustment under the revised SSO 
policy.
    A number of commenters cite our proposed policy as a violation of 
the Court's two-prong test for validity of a regulation established 
under Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc. 
467 U.S. 837, 842-843 (1984). Under the ruling, the Court asks whether 
the Congress addressed, in clear language, the issue in question and, 
if the answer is affirmative, the effect is given to the 
``unambiguously expressed intent of the Congress.'' If the ``statute is 
silent or ambiguous with respect to the specific issue,'' the Agency's 
interpretation is allowed to stand as long as it is based on a 
permissible construction of the statute.'' Id at 843. Deference to the 
Agency's interpretation is ``only appropriate when the agency has 
exercised its own judgment'' and is not based upon an erroneous view of 
the law.
    Response: In responding to the commenters' claims, we would first 
reiterate that we are not finalizing the specifics of the proposed 
IPPS-comparable option for payments under the SSO policy. In response 
to commenters' concerns and following

[[Page 27865]]

further data and policy analysis we believe that the policy that we are 
finalizing in this rule, and described in detail above, fairly 
addresses a circumstance that we presume was not envisioned when the 
Congress authorized the LTCH designation at section 1886(d)(1)(B)(I) of 
the Act (that is, paying for a substantial number of short stay 
patients--particularly those with extremely short stays--under a 
payment system designed to treat long-stay patients). Moreover, we 
believe that the quote used to establish Congressional intent actually 
addresses the situation that we faced in determining how to pay for 
short stay patients at a LTCH: ``[T]he DRG system was developed for 
short-term acute care general hospitals and as currently constructed, 
does not adequately take into account special circumstances of 
diagnoses requiring long stays'' (Report of the Committee on Ways & 
Means, U.S. House of Representatives to Accompany HR 1900, HR Report 
No. 98-25, at 141 (1983) Legislative history of the 1983 SS 
Amendments). We do not believe that we violated Congressional intent in 
either the BBRA of 1999 or the BIPA of 2000 in establishing a payment 
adjustment under the LTCH PPS that addresses our concerns about a 
significant number of short stay patients being treated at LTCHs. As 
indicated previously, section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA confers broad discretionary authority on the 
Secretary to implement a prospective payment system for LTCHs, 
including providing for appropriate adjustments to the payment system. 
This broad authority gives the Secretary great flexibility to fashion a 
LTCH PPS based on both original policies as well as concepts borrowed 
from other payments systems that are adapted, where appropriate, to the 
LTCH context. In the instant case, our finalized SSO policy utilizes, 
in large part, principles from the IPPS payment methodology and builds 
upon those concepts to create a LTCH PPS payment adjustment that 
results in an appropriate payment for those inpatient stays that we 
believe could be more appropriately treated in another setting. The PPS 
system authorized under both the BBRA and the BIPA emphasized the 
specific needs, resource use, costs, and payments for the patients who 
required hospital-level care for extended stays. Moreover, the 
authority extended to the Secretary by the BIPA included the discretion 
to ``provide for appropriate adjustments to the long-term hospital 
payment system,'' which, from the inception of the LTCH PPS for FY 
2003, we have interpreted to include the establishment of a payment 
adjustment for discharges that have lengths of stay considerably less 
than the ALOS and that receive significantly less than the full course 
of treatment for a specific LTC-DRG'' (67 FR 55995; August 30, 2002). 
Rather than our special payments for SSO violating the Congressional 
mandate for a distinction between the payment systems for acute care 
hospitals and, as according to the committee report cited above, 
``diagnoses requiring long stays,'' we believe that our payment 
policies are directly in accord with Congressional intent. We further 
believe that the new option of the blended payment actually captures 
Congressional intent since as the LOS appears to be more typical of the 
type of stay for which the LTCH PPS was established, the payment is 
based on a decreasing percentage of IPPS-comparable per diem payment 
amount while the percentage of payment based on the 120 percent of the 
LTC-DRG per diem payment amount increases. Therefore, we believe that 
our finalized payment adjustment for SSOs under which one payment 
option could be a blend of a percentage of an IPPS-comparable per diem 
payment amount that will decrease in direct proportion to an increase 
in the LOS and a percentage payment of the 120 percent LTC-DRG per diem 
payment amount, which will increase based on the LOS at the LTCH, is 
grounded in several existing Medicare payment adjustments. We also 
believe that the gradually shifting percentage of the payment blend 
recognizes the increasing use of resources and costs as the stay 
lengthens, and it is consistent with the Ways and Means Committee's 
above-cited definition of ``special circumstances of diagnoses 
requiring long stays.''
    We disagree with commenters that our LTCH PPS SSO policy that is 
based on an IPPS comparable payment amount is a payment under the IPPS. 
As indicated in various places throughout the preamble, section 123 of 
the BBRA, as amended by section 307(b)(1) of the BIPA, confers broad 
discretionary authority on the Secretary to implement a PPS for LTCHs, 
including providing for appropriate adjustments to the system. This 
broad authority gives the Secretary great flexibility to fashion a LTCH 
PPS based on both original policies as well as concepts borrowed from 
other payment systems that are adapted, where appropriate, to the LTCH 
context. In the instant case, our finalized SSO policy utilizes 
principles from the IPPS payment methodology and builds upon those 
concepts to create a LTCH PPS payment adjustment that results in an 
appropriate payment for those inpatient stays that we believe do not 
typically belong in LTCHs but would be more appropriately treated in 
another setting. In this final rule, we are further refining our 
existing SSO policy. Therefore, we disagree with commenters that the 
Secretary is acting in contradiction of the statute and inconsistently 
with the Chevron doctrine.
    Comment: Several commenters stated that when the Congress 
established LTCHs, they were described as hospitals with ``an average 
in patient LOS of greater than 25 days'' and that the statute did not 
say that cases must stay a ``minimum of 25 days.'' The commenters 
stated that the word ``average'' implies half of the lengths of stay 
would be below 25 days. The commenters maintained that statements made 
by CMS indicate that short stays at LTCHs are inappropriate. However, 
the commenter claims that it was clearly the Congress's intent that in 
establishing the definition of LTCHs, half of the patients would stay 
for fewer than 25 days.
    Response: We agree with the commenter that the statutory definition 
of a LTCH as a hospital with an ALOS of greater than 25 days allows a 
hospital to include short stay patients in meeting the average of 
greater than 25 days threshold. However, in both the BBRA and the BIPA, 
which authorized the development of the LTCH PPS, the Secretary was 
granted considerable authority to examine and to provide appropriate 
adjustments to the system. We believe that both in establishing LTCHs 
as hospitals excluded from the IPPS and also in mandating the 
development of the LTCH PPS, the Congress intended LTCHs to treat long-
stay patients with lengths of stay of approximately 25 days or more. 
The specific policies that we have established under the LTCH PPS are 
based on our interpretation of what the Congress intended for payment 
to LTCHs in the treatment of patients requiring an extended stay that 
could result in higher costs to the Medicare program. The SSO policy at 
Sec.  412.529 is an example of the premises upon which we developed the 
LTCH PPS since it provides for fractional payment of the LTC-DRG to a 
LTCH for stays that do not require the full resources typical of LTCHs. 
Similarly, the charge data generated from SSOs are given a fractional 
weight in setting LTC-DRG weights as opposed to those cases that 
generate a full LTC-DRG payment. Given the broad discretionary 
authority conferred by the statute to develop the

[[Page 27866]]

LTCH PPS, we do not believe the Congress intended to limit the 
Secretary's ability to make adjustment under the LTCH PPS for those 
cases that do not receive the full resources of a case in the 
respective LTC-DRG.
    Comment: One commenter urged us to review how Medicare Advantage 
views the use of LTCHs. If a patient covered by Medicare Advantage (MA) 
is at risk of deconditioning, according to the commenter, the patient 
is sent to a specific LTCH. This is because the prospects for 
restoration are increased and, additionally, such a policy also opens 
the plan's ICU and overall bed-day utilization rates.
    Response: MA plans are required to furnish enrollees with all 
medically necessary Medicare A and B services. Accordingly, MA 
coordinated care plans must contract with Medicare certified hospitals 
to ensure hospital access for its enrollees in the plan's service area. 
In some areas where there are cooperating LTCHs, MA organizations may 
elect to contract with LTCHs to provide care for their plan members. 
However, the terms of these contracts, including payment rates, are 
unique for each MA organization, its contracted providers (for example, 
LTCHs), and hospitals. Therefore, we are not able to comment on the 
particular situation to which the commenter is referring.
    Comment: Several commenters stated that the proposed IPPS-
comparable payment adjustment option under the SSO policy created a 
strong incentive to ``slow down provision of care'' because by 
extending the stay of a SSO LTCH patient by a few days (depending upon 
the particular LTC-DRG), a LTCH would receive the full LTC-DRG payment 
rather than the least of the proposed SSO formula, which could result 
in an IPPS-comparable payment to the LTCH. The commenters believe that 
it is in the LTCHs' best interests not to discharge the patient because 
the payment difference between the IPPS-comparable payment adjustment 
and the full LTC-DRG payment is so significant, particularly for stays 
approaching the \5/6\ geometric ALOS threshold. A number of commenters 
stated that the proposed payment policy for SSOs actually inverted the 
logic of the PPS and rather reinforced the former incentive of cost-
based reimbursement because more profit would be derived from longer 
stays. The commenters urged us to reconsider the proposed policy 
because they believe it contradicts the fundamental principle of a PPS, 
which is to reward efficiency. Several commenters asserted that under 
the proposed policy, successfully discharging the patient earlier 
because of efficiency and expertise to alternative care settings 
results in a financial penalty. Moreover, the commenters claimed this 
rewards providers who keep patients through the threshold. Furthermore, 
several commenters stated that our proposed revision to the SSO policy 
(that is, the IPPS-comparable payment option), which commenters said 
would significantly underpay SSO patients, countered the principles of 
prospective payment. Other commenters asserted that all PPSs operated 
in terms of an ``averaging principle'' which we were violating with the 
proposed IPPS-comparable payment option under the SSO policy. One 
commenter specified that ``SSO reimbursements are currently providing 
the margins that keep overall PPS payments in balance by offsetting 
losses on HCOs in particular.'' One aspect of this principle that they 
claim we are violating, is that by eliminating the opportunity for 
LTCHs to care for patients with costs that are less than Medicare 
payments, we are eliminating chances for those LTCHs to overcome losses 
by caring for patients whose costs of treatment exceed reimbursement 
levels.
    Response: We understand the commenters' concerns that our proposed 
IPPS-comparable payment option under the SSO policy could extend 
patient stays (that is, ``slowing down the provision of care'') to 
exceed the threshold and thus be paid a full LTC-DRG payment. In 
response to this comment and also to the claim that finalizing such a 
policy could have the unintended effect of ``inverting'' the logic of 
prospective payments so that an LTCH would reap financial benefits from 
longer (perhaps less efficient) stays, we would reiterate that we are 
not finalizing the specific proposed policy to which the commenters 
refer. We believe that the policy that we are establishing in this 
final rule more directly addresses our concerns that the current 
payment formula under the LTCH PPS overpays for those very short-stay 
SSO cases that could otherwise have been treated in a short-term acute-
care setting, while the final policy provides a higher payment amount 
than the proposed policy for SSOs with longer lengths of stay. The 
graduated payment scale, which increases the proportion of a LTC-DRG-
based payment while decreasing the proportion of an IPPS-comparable-
based payment, pays appropriately for long-stay cases while not 
overpaying for very short SSO stays. Under this finalized policy, 
Medicare will be paying more appropriately for the shorter stays that 
we believe could otherwise be treated in an acute care hospital while 
paying significantly more for those longer-stay cases that more closely 
resemble typical LTCH cases. Moreover, we believe that the graduated 
per diem increase of payments based on LTC-DRG weights in our final SSO 
policy does not penalize LTCHs for effective care that could result in 
an earlier discharge. Rather we believe that the policy provides for a 
fair payment for the efficiency and expertise that, in the case of an 
appropriate LTCH admission, could lead to a discharge that would be 
somewhat below the five-sixths SSO threshold and thus be paid as a SSO. 
Although we will be monitoring LTCH behavior, it is also our 
expectation that this revised policy will provide minimal rewards for 
unnecessarily lengthening a stay.
    For the commenters that indicated that the SSO policy is 
inconsistent with the averaging principle inherent in a PPS, we believe 
it is very important to evaluate the adjustment in light of the 
following. In a PPS there are numerous principles (for example, 
appropriate payment, predictability, averaging, beneficiary access to 
appropriate care, equity) that we try to balance simultaneously when 
making policy decisions. The averaging principle, while an important 
principle in the LTCH PPS, is not the only principle by which we make 
our policy decisions. For example, in the case of SSOs and HCOs, we 
must determine how to appropriately pay for aberrant cases that are 
much shorter (in the case of short stays) and much costlier (in the 
case of HCOs) when compared to typical cases in the relevant LTC-DRG.
    In the case of short stays, if we failed to adjust the payment to 
reflect that the case did not receive the full resources of a typical 
LTCH stay for the particular DRG, the PPS payment would be greatly 
``overpaying'' for the stay, may serve as an incentive to game the 
system, and would waste valuable Trust Fund dollars. Similarly, in the 
case of HCOs, if we did not adjust the payment to reflect the 
extraordinary high costs that a LTCH was incurring for treating a 
particular patient when compared to a typical case in the respective 
LTC-DRG, we would be ``underpaying'' significantly for the case. We 
have stated that providing additional money for HCOs strongly improves 
the accuracy of the payment system as well as reduces the incentive to 
under serve these patients (69 FR 55954 and 56022). Since we do not pay 
short stays outliers or HCOs an amount paid to ``inliers''/cases that 
have lengths of stay or costs commensurate with other cases in the 
respective LTC-DRG, but instead make

[[Page 27867]]

payment adjustments to reflect the unique circumstances of these cases, 
the averaging principle is less heavily emphasized under these 
circumstances to achieve equity, appropriate payments that accurately 
reflect resource costs at the patient and hospital level, and 
beneficiary access to medical care.
    We believe that, given that LTCHs are defined as acute care 
hospitals that have an average inpatient LOS of greater than 25 days, 
the payment policies under the LTCH PPS appropriately reflect the 
averaging principle. That is, where some cases within the inlier range 
will have generated relatively lower costs, other cases will generate 
higher costs and Medicare will pay a LTCH the same for both less and 
more costly cases. The SSO policy, along with the HCO policy, addresses 
payments for cases that fall outside the normal types of averaging in 
the inlier range in the PPS and ensures that payment for SSO cases is 
not greatly in excess of the resources required to treat those cases. 
The payment system modeling and data projections that we generated in 
developing the revised payment options for SSOs that we are finalizing 
in this final rule at Sec.  412.529(c)(4), indicates that our payments 
will be consistent with the particular way in which the ``averaging 
principle'' is applied to the LTCH PPS, described above. Therefore, 
this policy that we are finalizing does not represent a change from the 
underlying premise of either the prospective payment or the particular 
approach that we used in determining how to pay for short stays at 
LTCHs since the outset of the LTCH PPS for FY 2003. We also believe 
that this finalized policy should reduce any payment incentive under 
the present SSO policy to admit short-stay patients who could otherwise 
be treated at short term acute care hospitals paid for under the IPPS.
    With regards to the commenters who noted that, ``SSO reimbursements 
are currently providing the margins that keep overall PPS payments in 
balance by offsetting losses on HCOs in particular,'' we would note 
that MedPAR data from FY 2003 and part of FY 2004 also reveal that 
payments to LTCHs for SSOs and inliers more than offset losses for HCOs 
and, in fact, produces an aggregate average margin of 10.5 percent. 
Furthermore, since the HCO threshold decreased from RY 2004 to RY 2005 
from $19,590 to $17,864, it is probable that the aggregate margin for 
the later period is even higher. Therefore, the policy that we are 
finalizing will decrease the margins that our data indicates have 
generally been realized by LTCHs for their SSO patients under the 
existing SSO payment policy. In large part, these margins have resulted 
from excessive payment for those very short-stay SSO cases. However, we 
are not finalizing the proposed policy which would have significantly 
reduced Medicare payments for all SSO discharges. We believe that the 
revised SSO payment policy that we are finalizing addresses our 
concerns with excessive payments for very short stay SSO cases while 
providing a higher payment amount than the proposed policy for SSOs 
with longer lengths of stay.
    Comment: One commenter noted that payments under the SSO policy 
that we have proposed under the IPPS-comparable option did not account 
for cases that are SSOs at LTCHs but would be HCOs at a short term 
acute-care hospital. In addition, the commenters state that it is 
possible that these cases could qualify as a HCO at a short term acute-
care hospital and still be an SSO at the LTCH.
    Response: The commenter's statement is accurate. Although we are 
not finalizing the specific proposed IPPS-comparable payment option, we 
remain concerned about making appropriate payments to LTCHs and 
ensuring that appropriate patient care is what determines admission to 
a LTCH. In our reevaluation of our SSO policy, we have expressed 
concern that our policy either at the short term acute-hospital or the 
LTCH-level may provide an incentive for LTCHs to admit patients from 
short term acute-care hospitals once their costs exceed what the 
hospital expected Medicare to pay--a circumstance that we did not want 
our payment policy to encourage either at the acute care hospital or at 
the LTCH. Rather, a patient treated at a short term acute-care hospital 
who becomes a HCO patient, upon being stabilized and still continues to 
need hospital care, could appropriately be discharged to a LTCH for 
post-acute care. In this situation, the patient would have received the 
full measure of treatment at the short term acute-care hospital since 
the high costs associated with outlier payments are included in the 
computations leading to both the establishment of the DRG relative 
weights, as well as setting the fixed-loss amount associated with the 
HCO threshold. Therefore, the goal of our payment policy is for 
Medicare to pay appropriately for the care given to the patient and for 
the patient's required level of care to be the determining factor in 
hospital admissions.
    Comment: Many commenters submitted suggestions for us to consider 
as we move to establish both facility and patient-level criteria for 
LTCHs as recommended in MedPAC's June 2004 Report to Congress. One 
commenter asserted that: Adjustments should not compromise quality of 
care to beneficiaries or limit access to services; the payment system 
should reward providers that provide high quality, cost efficient care 
to Medicare beneficiaries; adjustments should not undermine the 
predictive power of the PPS or its efficiency in tying payments to 
actual service costs; the payment system should remain as uncomplicated 
and transparent as possible to providers; with the exception of very 
HCOs, payment policy should never result in payment below cost; and the 
payment system should permit providers to achieve reasonable margins as 
a basis for implementing technologies and replacing or renovating 
existing physical plant or equipment. Another commenter specified that 
we should adopt requirements for pre-admission, concurrent and post-hoc 
review of the appropriateness of LTCH admissions, as well as require 
physician certification (a practice that is required for other 
providers) of medical necessity for LTCH services based on guidelines 
established by CMS through the notice and comment rulemaking process.
    Another commenter urged us to adopt uniform admission and 
continuing stay screening criteria to ensure that only appropriate 
patients are admitted to LTCHs, noting that some LTCHs use InterQual (a 
product of McKesson Provider Technologies) which is the screening 
instrument used by the majority of QIOs and that we should require the 
use of this or some other instrument. We were also urged to adopt 
MedPAC's recommendation and expand the sample of LTCH cases reviewed by 
QIOs for admission and continuing stay appropriateness. Several 
commenters informed us that an association of LTCHs and a QIO are 
developing screening criteria that ensure the severity of illness and 
the intensity of treatment is appropriate and valid. One commenter 
specifically requested that we change the criteria for LTCH 
classification. The recommended changes included measuring and 
monitoring LTCH patient characteristics by using a 25-day ALOS and 
requiring that at least 50 percent of every LTCH's discharges would be 
classified into an APR-DRG severity of illness (SOI) level 3 or 4. 
Several commenters addressed the issue of patient outcomes, 
specifically whether there is any relationship between higher payments 
at LTCHs and improved patient outcomes when the similar patients are 
treated in different treatment centers. Many commenters acknowledged 
our

[[Page 27868]]

concern about the appropriateness of the ``shortest'' of the short 
stays at LTCHs and the payment consequences for the Medicare system but 
stated that the focus on clinical and facility level criteria was a 
viable alternative, that is, ``* * * provide needed cost savings while 
assuring that the clinical determination of proper level of care 
continues to be based on medical necessity determination.'' Several 
commenters offered to work with Medicare to develop sound and 
reasonable criteria that would allow us to tighten clinical criteria 
appropriately. It was suggested that we work with industry to develop a 
consensus on patient assessment and placement criteria. Several 
commenters asserted that the proposed policies do not address the real 
problems cited by CMS regarding the growth of the LTCH industry and the 
behavior of some operators. The commenters warned that these problems 
will continue until we have established facility and patient level 
standards. One commenter noted, ``[U]ntil this occurs, too many 
operators will continue to find ways to admit low acuity patients and 
capture a payment mechanism that was carefully developed to serve 
complex, high acuity patients. This will continue to offer the high 
profit margins that drive the rapid growth of LTCHs.''
    Response: We thank the commenters for sharing their thoughts on the 
future of the LTCH PPS, the direction we should follow to assure the 
highest level of patient care, admission and treatment of appropriate 
patients at LTCHs, and fair payment policies. We note that LTCHs are 
certified as acute care hospitals but are classified as LTCHs for 
payment purposes. We believe the commenter means to address the issue 
of classification. In response to the commenters that specifically 
requested that we change certification criteria for LTCH 
classification, we note that such action may require legislative 
action. Recommendations that we focus on the relationship between 
patient outcomes and payments and appropriate placement and assessment 
criteria echo some of the major issues that we have asked RTI to study. 
We are aware of McKesson Provider Technologies' screening instrument, 
InterQual, and its use by many QIOs as well as LTCHs, and we have been 
informed of the work being done by individual hospital groups and 
hospital associations to develop other instruments. (Suggestions 
regarding the roles of QIOs in evaluating LTCH admissions are addressed 
elsewhere in these responses.) We appreciate the statements made by 
many commenters in support of concerns underlying many of our policies 
and for the overall goals of our regulations. We believe that we have 
been accessible to providers and we thank them for their offers to 
participate in further discussions on the development of criteria. 
Moreover, we also support the strengthening of pre-admission provider 
certification criteria for LTCH admissions and any other criteria that 
better define medically complex patients for the purpose of 
distinguishing them in terms of appropriate level of care. We believe 
that many of the issues raised by commenters will be addressed in RTI's 
final recommendations, which we expect to be submitted in the late 
Spring of 2006. We further believe that under the revised SSO policy 
blend option that we are finalizing in this final rule, the Medicare 
program will pay for short stay cases under a fair, equitable, and 
reasonable methodology which will not undermine patient access to 
LTCHs, should not result in any compromise in the quality of care 
offered by LTCHs, and will not undermine either the principles nor the 
predictive power of the LTCH PPS.
    Comment: MedPAC commented that they share our concerns about short 
stay patients in LTCHs. However, MedPAC found that our proposed 
revisions to the SSO policy ``too severe'' because they believe that 
over time the policy would continue to affect a large percentage of 
admissions regardless of the admission policies of LTCHs. Furthermore, 
MedPAC does not believe that our proposed policy addresses the 
underlying problem of LTCHs which is the lack of patient and facility 
criteria, including national admission standards (such as specific 
clinical characteristics and treatments), as well as discharge 
criteria. MedPAC notes facility characteristics could include 
requirements for multidisciplinary teams, and a requirement that a 
percentage of cases meet established SOI criteria. MedPAC urged us to 
move forward with their recommendations for the development of this 
criteria, outlined in the June 2004 Report to Congress (which they 
understand is the goal of RTI's work). MedPAC believes moving in this 
direction would better provide appropriate care to beneficiaries who 
need the level of care provided by LTCHs.
    Response: We thank MedPAC for supporting our goals regarding short 
stays at LTCHs. As noted above, we are not finalizing the proposed 
policy. Rather, we have developed a policy which we believe will 
eliminate many of the incentives to admit inappropriate patients whose 
very short stays do not require the full resources of a LTCH. We agree 
with MedPAC's assertions that evaluating the development of patient and 
facility criteria, and the establishment of national admission 
standards including clinical characteristics and treatments, as well as 
discharge criteria, are of central importance. Our contract with RTI, 
discussed in section XII of this final rule, focuses on the feasibility 
of implementing MedPAC's June 2004 Recommendations and, as noted above, 
we expect the final report to be submitted in the late Spring of 2006.
    Comment: One commenter, acknowledging CMS's and MedPAC's concerns 
about the continued growth in the numbers of LTCHs and significant 
increases in costs to the Medicare system, suggested a moratorium on 
the establishment of new LTCHs. The commenter noted that most likely 
this may require legislative action.
    Response: We thank the commenter for supporting our general 
concerns. A moratorium on the development of new LTCHs may require 
action by the Congress.
    Comment: One commenter stated that the proposed SSO policy dictated 
that all SSO cases were inappropriate admissions to LTCHs, and that our 
position is antagonistic to QIO procedures and standards, defeats 
important patient rights, and directly interferes with professional 
judgment of clinicians. The commenter believes that the proposed rule 
dictates that all SSO cases should remain in an acute care hospital 
setting which gives rise to notice of non-coverage issues and that in 
such instances, we may be required to send a notice of non-coverage 
under existing regulations and manuals.
    Response: We would point out that the proposed IPPS-comparable 
option of the SSO policy to which the commenter is objecting is not 
being finalized. Rather, after the consideration of comments, we are 
finalizing a policy that we believe pays fairly for longer stays that 
still qualify as SSOs but yet does not provide a financial incentive 
for inappropriately admitting of the shortest of stays. We continue to 
believe that LTCHs were established by the Congress to provide 
hospital-level care for long stay patients, that is, patients requiring 
hospital-level care for an average Medicare inpatient LOS of greater 
than 25 days. There has been no intent by CMS to establish a rule 
restricting LTCH admissions to ``defeat important patient rights'' or 
to otherwise interfere with the judgment of physicians. Rather we seek 
to encourage the admissions of patients generally

[[Page 27869]]

requiring the type of care associated with LTCHs and to pay 
appropriately for care and treatment provided to these patients. While 
we had previously discussed the role of QIOs regarding the LTCH PPS, we 
would also emphasize that, presently, there is no review of hospital-
level care that distinguishes whether care should be delivered at a 
short-term acute-care hospital or at a LTCH, as long as the care is 
appropriate. Both are certified under Medicare to provide acute care 
inpatient hospital services.
    Under our QIO program, QIOs compare services to standards of care 
to determine whether services are reasonable and medically necessary, 
whether the quality of services meets professionally recognized 
standards, and whether services in an inpatient hospital or other 
inpatient health care facility could, consistent with the provision of 
appropriate medical care, be effectively provided more economically on 
an outpatient basis or in an inpatient facility of a different type. We 
have not historically interpreted any of these areas of review to 
involve determinations of which kind of acute care facility would be 
appropriate, and we do not regard short term acute-care hospitals and 
LTCHs as facilities ``of a different type.''
    We disagree with the commenters' statements regarding notices of 
non-coverage. We are not determining that treatment of a short-stay 
patient at a LTCH is a non-covered service. We are also not requiring 
possible SSO patients to remain in short term acute care hospitals. 
Rather, we are ensuring appropriate payments for the care of SSO 
patients under the LTCH PPS. A notice of non-coverage is generally 
issued when a patient disagrees with being discharged from an acute 
care hospital to a SNF, despite a medical determination that hospital-
level care is no longer appropriate. The patient, at that time, may 
exercise the right to have the QIO review the proposed discharge to 
determine whether the discharge from the hospital is appropriate. 
However, if a Medicare beneficiary disagrees with being discharged from 
a short term acute-care hospital to a LTCH, no notice of non-coverage 
would be issued because there is no change in the level of care (both 
are certified as acute care hospital providers). There is no need for 
the QIO to review the appropriateness of the discharge.
    Comment: Several commenters believe most LTCH admissions are based 
on InterQual criteria, also used by most QIOs, and that the use of 
these criteria has led to a significant drop in SSO cases. (InterQual 
is a product of McKesson Provider Technologies which is the screening 
instrument used by the majority of QIOs.) These commenters stated that, 
in our proposed rule, we discussed a QIO sampling of 116 LTCH records 
(selected on a monthly basis) and noted the resulting determination 
that 29 percent of the LTCHs' admissions were not medically necessary, 
that is, did not require hospital-level care, but also noted as well 
that this finding was not characteristic of most LTCHs. In contrast, 
individual commenters noted that QIO reviews of a sample of LTCH cases 
at specific LTCHs or of LTCHs that are part of a LTCH corporation 
reveal that in three separate evaluations, 1.1, 1.6, and 1.0 percent, 
respectively, of the samples were denied for lack of medical necessity 
or for inappropriate admission. The commenters further asserted that we 
have no basis to say that the number of SSOs should be reduced further 
since their admissions were evaluated under ``widely-accepted, 
objective criteria.'' In fact, the commenters stated there was a drop 
in SSOs of 30 percent, indicating that LTCH PPS incentives are working 
and CMS should target cases, following a meaningful analysis of data 
that reveal inappropriate admissions to LTCHs. Focusing on an expanded 
role for QIOs, as recommended by the MedPAC June 2004 Report to 
Congress, two commenters suggested that since there will be no update 
in the standard Federal payment rate under the LTCH PPS, that we assign 
available funds for increased QIO reviews.
    Response: We appreciate that several commenters noted that there 
had been a decrease in the number of SSO cases since the start of the 
LTCH PPS for FY 2003. Some of the commenters pointed out that the 
change can be attributed to our present policy that endorses our 
general goal of reducing the number of cases admitted to LTCHs since 
some could be effectively treated at short-term acute care hospitals.
    While we are aware of the use of admission criteria, including 
InterQual, by a large percentage of LTCHs and believe that although 
these instruments may provide a significant service regarding base-line 
admission determinations at LTCHs, we also understand that such 
instruments focus on the distinction between acute care and sub-acute 
care, that is, SNF-level of care, and determinations of ``medical 
necessity'' or ``inappropriate admission'' are based only on whether 
the patient should be hospitalized, rather than on whether the 
hospitalization should occur at a LTCH or at a general acute care 
hospital. Although we know there are products in the marketplace that 
are targeted to the LTCH population, our review of the criteria used by 
those products did not assure us that the criteria clarifies any 
specifics other than whether the patient needs acute hospital-level 
care. As explained earlier, we have revised the proposed IPPS-
comparable option of the SSO policy and we believe that the finalized 
policy, described in detail above, provides a fair and reasonable 
payment for LTCHs treating SSO patients. Moreover, we believe that the 
policy reflects our belief that as the LOS of a particular patient 
increases, the stay begins to resemble the type of stay envisioned by 
the Congress when the LTCH payment classification was established in 
1983.
    In response to commenter's assertions about the QIO's present 
responsibility regarding LTCHs, we believe that it is appropriate to 
clarify the work that QIOs currently perform in the Medicare program. 
Under Sec.  412.508, the QIOs function in LTCHs parallel their 
functions with short-term acute care hospitals. Prior to the 
implementation of the LTCH PPS for FY 2003, there was no QIO role 
regarding medical necessity and coding of LTCH claims (FIs were tasked 
with that activity and until January of 2004, when appropriate 
procedures were in place, QIOs only performed retrospective reviews in 
LTCHs for quality of care). QIOs are empowered by statute to determine 
if Medicare-covered services are medically necessary and provided in 
the appropriate setting, specifically, a hospital as opposed to a SNF.
    Since January 2004, we have selected and QIOs have reviewed an 
annual national random sample of 116 LTCH records per month 
(approximately 1400 cases total per year), quoted by a number of 
commenters. Recent analysis of the 2004 sample revealed that 17.4 
percent of LTCH claims were determined to be payment errors and 5.9 
percent of the claims were determined to be admission denials. This 
sampling represents the QIO's role of retrospective review (for 
example, ``At the time of admission, did the patient require an acute 
level of care and was Diagnosis Related Group (DRG) coding correct?'') 
If a LTCH admission was determined not to be medically necessary or not 
in the appropriate setting, the result of the review could be a 
recovery of funds by the Medicare program. In addition, if ICD-9-CM 
coding was determined to be incorrect, the claim would be adjusted to 
reflect the correct coding, whether that meant an increase or a 
decrease in payment.
    A QIO uses criteria, based on typical patterns of practice in the 
QIO's review

[[Page 27870]]

area for the review setting. For example, if a patient in a particular 
state requires acute psychiatric care, then the screening criteria 
should be acute inpatient psychiatric criteria. The QIOs also consult 
with a physician(s) and practitioner(s) actively engaged in practice in 
that state and to the extent possible, a specialty match, when making 
the determination that care was or was not medically necessary. 
Although a QIO review can detect whether or not the patient requires an 
acute level of care or whether care in a SNF would be appropriate, 
since both acute care hospitals and LTCHs are certified as acute care 
hospitals, QIOs do not make the distinction between whether a patient 
should be hospitalized at an acute care hospital or at a LTCH, so long 
as the patient requires an acute level of care.
    QIOs are authorized by statute to determine whether, in case such 
services and items are proposed to be provided in a hospital or other 
health care facility on an inpatient basis, such services and items 
could, consistent with the provision of appropriate medical care, be 
effectively provided more economically on an outpatient basis or in an 
inpatient health care facility of a different type as specified in 
section 1154(a)(1)(C) of the Act. Therefore, QIOs have authority to 
determine the appropriate hospital-level setting in the face of 
objective criteria. But there is no objective criteria distinguishing 
between settings where acute care is delivered. Since the statute 
states ``a facility of a different type,'' because short term acute 
care hospitals and LTCHs are very similar and provide the same level of 
care, CMS has at no time interpreted ``a facility of a different type'' 
in section 1154(a)(1)(C) of the Act to mean that QIOs must distinguish 
between them.
    In a memorandum issued to the Regional Offices, Chief Executive 
Officers, and all QIOs, from the Director of the Quality Improvement 
Group of the CMS Office of Clinical Standards on October 28, 2004, 
among other matters, the following policy was further clarified:


    ``Note: there are different provider types that may offer the 
same level of intensity of inpatient care. QIOs do not specify which 
provider type should be used when the level of intensity is the 
same. For example, a patient requires an acute level of care that 
could be delivered in a short-term acute care PPS hospital, a long-
term care hospital or an acute rehabilitation hospital. The QIO 
determines what intensity of care is appropriate (that is, the 
patient requires an acute level of care) but would not specify as a 
matter of admission necessity which provider type the patient should 
be admitted to. If the QIO determines that there is a quality of 
care concern implicated, that issue should be addressed through the 
quality review process.''


    Under current contracts, QIOs review LTCH cases under the following 
circumstances: When a claim is selected for purposes of determining or 
lowering the payment error rate; if there is a QIO-identified need to 
perform additional review based on their contractual responsibilities; 
if there is an immediate appeal of certain beneficiary notices; as a 
result of the referral of a case or cases; or when there is a 
beneficiary complaint or other quality of care concern.
    Since one of the recommendations made by MedPAC in their June 2004 
Report to Congress was for an increased role for the QIOs in monitoring 
criteria to assure that LTCHs are treating appropriate patients, 
researchers from RTI have been in contact with several QIOs nationwide 
in order to evaluate their role. Any attempt, however, to involve QIOs 
in the on-going determination of the appropriateness of admissions, 
continuing stay or discharge for a significant proportion of LTCH 
patients was never envisioned when the QIO program was established. 
There will not be a reassignment of Medicare funds to QIOs from the 
LTCH PPS.
    Comment: One commenter expressed concern that if our proposed 
policy revision for SSOs is finalized, FIs will not have sufficient 
time to make necessary system changes to process payment and 
substantial payment delays to providers will result.
    Response: As noted above, we are not finalizing the specific 
proposed IPPS-comparable payment revision to the SSO policy, and in the 
previous responses, we have described the policy that we are finalizing 
for RY 2007. In response to the commenters' concerns, we have been 
assured by our systems analysts that there should be no delay in the 
processing of claims under the final policy.
    Comment: One commenter asserted that the high cost of Medicare 
payments is directly related to high physicians' billing. Therefore, 
the commenter suggested that rather than reducing payments to LTCHs 
through our proposed SSO payment policy, Medicare should consider a 
limit on physician inpatient billing.
    Response: This comment is beyond the scope of this regulation.
    Comment: Several commenters noted that payment issues for post 
acute care hospital-level providers cut across provider types and urged 
us not to ``operate in a silo,'' by allowing competition among such 
providers for patients without clear clinical guidelines as to what 
would be the most appropriate setting for the patient. Another 
commenter asserted that the RTI study could serve as the basis for an 
in-depth discussion between CMS, physicians, LTCHs, and patients 
regarding how to address our broader concerns in a fair, fiscally sound 
manner.
    Response: We understand and share the concerns expressed by these 
commenters. Although the central focus of the RTI study is to determine 
the feasibility of establishing LTCH-specific patient and facility-
level criteria, a comprehensive evaluation required our researchers to 
analyze claims from alternative providers such as acute care hospitals, 
IRFs, IPFs, and also SNFs since many patients who could otherwise be 
treated at LTCHs receive treatment or care in one of those alternative 
settings. In the RY 2007 LTCH PPS proposed rule, we included a 
substantial portion of RTI's work in this area (71 FR 4704 through 
4726). The RTI report (discussed in section XII of this final rule) 
should be finalized by late Spring 2006 and we are expecting the final 
report to provide us with further information and recommendations on 
the particular issues raised by the commenters. In general, we believe 
that we have been very responsive to the LTCH industry while conducting 
this analysis, responding to specific concerns as well as meeting with 
physicians, representatives, and LTCHs, and their representatives 
throughout the year. Once we have evaluated the results of RTI's final 
report, we will make the findings available to the public. These 
findings will serve as the basis for future conversations between CMS 
and the public.
    Comment: Some commenters submitted very specific comments 
describing the essential role that LTCHs play in their continuum of 
health care, and warning of negative consequences should LTCHs be 
forced to close as a result of our proposed SSO payment adjustment.
    Response: As previously stated in this final rule, we have decided 
not to finalize the proposed IPPS-comparable payment option to the SSO 
policy. Rather, we believe that the finalized policy will provide 
appropriate payment for SSO patients at LTCHs. We understand the 
important care that is rendered at LTCHs and the significance of these 
facilities in their individual communities, as well as the impact that 
a successful LTCH stay can have on the life of patients and families. 
We believe

[[Page 27871]]

that in our finalized SSO policy we have addressed the basic goals of 
refining our payment policies under the LTCH PPS to ensure that 
Medicare beneficiaries receive high quality medical care in an 
appropriate provider setting, and that Medicare renders payment that 
reflects fair and reasonable payment for that care.
    Comment: One commenter noted the important role that LTCHs may have 
to play in the event of an avian influenza pandemic because of their 
significant ventilator capacity and urged us to not hamper the ability 
of LTCHs to serve as important components in our national public health 
response system by finalizing the proposed SSO policy.
    Response: We believe that the policies established in this RY 2007 
final rule, including the SSO payment policy revision, will result in 
LTCHs being unable to continue to provide hospital-level care, 
particularly in the areas of their expertise, such as treating patients 
requiring ventilator care. In the event of a national public health 
response, we would expect that LTCHs will continue to function in an 
appropriate manner providing necessary and appropriate health care to 
their communities.
b. Changes to the Determination of Cost-to-Charge Ratios (CCRs) and 
Reconciliation of SSO Cases
    In the June 9, 2003 IPPS outlier final rule (68 FR 34507), we 
revised the short-stay policy at Sec.  412.529 (and the HCO policy at 
Sec.  412.525(a)) because, as we discussed above in this section, we 
believed that the SSO (and HCO) policy are susceptible to the same 
payment vulnerabilities that became evident under the IPPS, and 
therefore, merited revision. Therefore, in the regulations under 
existing Sec.  412.529(c)(5)(ii) and (iii), we established a policy for 
the determination of LTCH CCRs and the reconciliation of SSO payments, 
for discharges occurring on or after August 8, 2003 (Sec.  
412.529(c)(5)(ii)) and October 1, 2003 (Sec.  412.529(c)(5)(iii)), 
respectively. (As noted above in this section, in that same final rule, 
we established the same changes to the HCO policy at existing Sec.  
412.525(a)(4)(ii) and (iii).)
    In the RY 2007 LTCH PPS proposed rule (71 FR 4674 through 4676, and 
4690 through 4692), we discussed our current methodology for 
determining hospitals' CCRs under the LTCH PPS HCO and SSO policies, 
and we presented a proposal to refine our methodology for determining 
the annual CCR ceiling and statewide average CCRs. In that same 
proposed rule, we also discussed our existing policy for the 
reconciliation of LTCH PPS HCO and SSO payments along with our proposal 
to codify in subpart O of part 412 those policies, including proposed 
modifications and editorial clarifications to those existing policies.
    Historically, annual updates to LTCH CCR ceiling and statewide 
average CCRs have been effective October 1, and in the RY 2007 LTCH PPS 
proposed rule, we proposed revisions to the policies governing the 
determination of LTCHs' CCRs and the reconciliation of HCO and SSO 
payments which would be effective October 1, 2006. In addition, we 
stated that the LTCH CCR ceiling and statewide average CCRs reflecting 
the proposed policy changes, which would be effective October 1, 2006, 
would be presented in the annual IPPS proposed and final rules.
    As noted above in section V.D.3.b. of this preamble, we received a 
few specific comments concerning the proposed changes to the policies 
governing the determination of LTCHs' CCRs. Several other commenters 
referenced one of the specific comments on the proposed changes to the 
methodology for determining LTCH CCRs in their own comments on the RY 
2007 LTCH PPS proposed rule. Based on a commenter's synopsis of our 
proposed changes concerning the determination of LTCH's CCRs, we 
believe that the commenters clearly understood the nature and purpose 
of the proposed changes. However, the commenters pointed out that, in 
the RY 2007 LTCH PPS proposed rule, we did not provide an analysis of 
the effect of the proposed change, nor did we provide an example of the 
new CCR values under this proposed methodology. Another commenter did 
not ``object in concept to the proposed combination of [IPPS] operating 
and capital cost-to-charge ratios'' to compute a ``total'' CCR for each 
IPPS hospital by adding together each hospital's operating and capital 
CCR from which to compute the LTCH CCR ceiling and applicable statewide 
average CCRs. However, the commenter also pointed out that we did not 
provide any impact data and requested that we defer adoption of the 
proposed change until such data are provided for comment. Therefore, in 
the FY 2007 IPPS proposed rule (71 FR 24132 through 24136), we again 
proposed these same changes to the policies governing the determination 
of LTCHs' CCRs and the reconciliation of HCO and SSO payments that we 
proposed in the RY 2007 LTCH PPS proposed rule. We note that in the FY 
2007 IPPS proposed rule, we also tried to further clarify our 
explanations of our proposed method for calculating the CCR ceiling and 
statewide average CCRs under the LTCH PPS. Consequently, although the 
policy proposal presented in that proposed rule is the same as the 
proposal presented in the RY 2007 LTCH PPS proposed rule, the 
explanations have been further simplified where possible. Along with 
that proposal, we also included in that IPPS proposed rule the values 
of the proposed LTCH CCR ceiling (1.131) and the proposed statewide 
average LTCH CCRs (as shown in Table 8C of the FY 2007 IPPS proposed 
rule; 71 FR 24377) that would be effective October 1, 2006, based on 
our proposed policy changes (along with the proposed values of the LTCH 
CCR ceiling and statewide average CCRs that would be determined under 
our current methodology). Therefore, in this final rule, we are not 
finalizing any changes to the policies governing the determination of 
LTCHs' CCRs or the reconciliation of LTCH PPS HCO and SSO payments. We 
will respond further to any comments received on the proposal 
concerning changes to the policies governing the determination of 
LTCHs' CCRs and the reconciliation of LTCH PPS HCO and SSO payments 
presented in the FY 2007 IPPS proposed rule (71 FR 24125 through 24136) 
in the FY 2007 IPPS final rule that will be published this summer.
    As we discuss above, we are revising Sec.  412.529 of the existing 
regulations based on the changes we are establishing to the SSO payment 
formula in this final rule. Since we are not finalizing any changes to 
the policies governing the determination of LTCHs' CCRs or the 
reconciliation of SSO payments, the changes we are making to Sec.  
412.529 in this final rule reflect our existing policy regarding the 
determination of LTCHs' CCRs and the reconciliation of SSO payments. 
Also as discussed above, in the FY 2007 IPPS proposed rule, we again 
proposed changes regarding the determination of LTCHs' CCRs and the 
reconciliation of LTCH PPS SSO payments under Sec.  412.529(c) based on 
the existing regulatory language in Sec.  412.529. We note that, to the 
extent the policy changes we proposed in the FY 2007 IPPS proposed rule 
regarding the determination of LTCHs' CCRs and the reconciliation of 
SSO payments are implemented, we may need to make conforming changes to 
the regulatory language in Sec.  412.529 in the FY 2007 IPPS final rule 
to ensure that any such changes are consistent with (and do not 
contradict) the changes we are making to Sec.  412.529 in this final 
rule.

[[Page 27872]]

2. The 3-day or Less Interruption of Stay Policy
    In the RY 2005 LTCH PPS final rule, we revised the definition of an 
``interruption of a stay'' at Sec.  412.531(a) by establishing two 
distinct categories, ``[a] 3-day or less interruption of stay'' at 
Sec.  412.531(a)(1) and ``[a] greater than 3-day interruption of stay'' 
at Sec.  412.531(a)(2). The payment features of the ``greater than 3-
day'' policy itself apply beginning with day 4 once the ``3-day or 
less'' policy no longer applies.
    The 3-day or less interruption of stay policy is defined at Sec.  
412.531(a)(1) as ``a stay at a LTCH during which a Medicare inpatient 
is discharged from the LTCH to an acute care hospital, IRF, SNF, or the 
patient's home and readmitted to the same LTCH within 3 days of the 
discharge from the LTCH. The 3-day or less period begins with the date 
of discharge from the LTCH and ends not later than midnight of the 
third day.'' As discussed in detail in the RY 2005 LTCH PPS final rule 
(69 FR 25691 through 25700), there are several components to the 
payment for the 3-day or less interruption of stay.
    First, subject to Sec.  412.531(b)(1)(ii)(A)(1) and 
(b)(1)(ii)(A)(2), only one LTC-DRG payment will be made to the LTCH for 
the patient who is discharged from the LTCH to an acute care hospital, 
IRF, SNF, or patient's home and readmitted to the same LTCH within 3 
days. Secondly, under Sec.  412.531(b)(1)(ii)(A)(2), any tests or 
medical treatment, either inpatient or outpatient, provided at an acute 
care hospital or an IRF, or at a SNF and not otherwise excluded under 
Sec.  412.509(a), must be provided by the LTCH ``under arrangements'' 
if the patient is readmitted to the LTCH within 3 days. We established 
a time-limited specific exception to the ``under arrangements'' 
requirement during the RY 2005 LTCH PPS, at Sec.  
412.531(b)(1)(ii)(A)(1), in the event that the treatment at the acute 
care hospital was grouped to a surgical DRG under the IPPS (69 FR 25696 
through 25700).
    We also stated that, in addition to having sufficient data to 
decide upon continuing the exception, we would evaluate whether 
additional refinements to the overall 3-day or less interruption of 
stay policy were warranted (69 FR 25697). In the RY 2006 LTCH PPS final 
rule, we extended for RY 2006, the surgical DRG exception to the 3-day 
or less interruption of stay policy because, as we stated, ``[t]he 3-
day interruption of stay policy was first implemented on July 1, 2004, 
and, therefore, we do not yet have sufficient data to accomplish the 
above evaluations * * *''. We continued, ``we will be analyzing claims 
data over the next year to determine whether the surgical DRG exception 
to the `under arrangements' feature of the 3-day or less interrupted 
stay policy is actively accomplishing our goal of reducing unnecessary 
Medicare payments and to deter inappropriate Medicare payments while 
not compromising beneficiary access to medically necessary services. We 
believe that we will have sufficient data to evaluate continuation of 
the exception and also whether additional refinements to the overall 3-
day or less interruption of stay policy are warranted'' (70 FR 24206).
    We also specified that we were particularly interested in analyzing 
data from LTCHs to determine whether there was a significant increase 
in interruptions of 4-days since the establishment of the policy. To 
the extent interruption of stay had increased to at least 4 days (one 
day past the 3-day threshold that would prevent the 3-day or less 
policy from being triggered), we believed that this behavior could 
indicate inappropriate efforts to side-step the provisions of our 3-day 
or less interruption of stay policy.
    As part of our on-going monitoring program (as discussed in Section 
XI. of this final rule), ORDI analyzed claims from the MedPAR files for 
LTCH discharges from July 1, 2004 through June 30, 2005 and performed 
the data analysis necessary to evaluate the impact of the surgical DRG 
exception to the 3-day or less interruption of stay policy. As shown in 
Table 12, the data revealed the following for the RY 2005 LTCH PPS.

                                Table 12
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Total LTCH discharges..............................              120,895
Total covered charges..............................    $8,694,137,026.00
Average covered charge.............................           $71,855.00
Total cases assigned an IPPS Surgical DRG at an                      459
 acute care hospital...............................
Average covered charge for:
    DRGs Non-surgical..............................           $18,103.00
    DRGs Surgical..................................              $22,429
Total covered charges for surgical stays...........          $10,294,925
------------------------------------------------------------------------

    The data does not convince us that a continuation of the surgical 
DRG exception to the 3-day or less interruption of stay policy is 
warranted. We believe that the data cited above support the following 
conclusions:
     The surgical cases that fell within this exception are 
present in only a small fraction of LTCH hospitalizations and that, 
therefore, they were neither numerous nor would they be significantly 
costly for LTCHs to cover ``under arrangements;''
     The surgical DRGs for which Medicare claims were submitted 
by the acute care hospital appear to support, in large part, our 
original hypothesis that if a LTCH patient was discharged to an acute 
care hospital for only 1, 2, or 3 days, followed by a readmission to 
the LTCH, there could be reason to believe that the treatment 
delivered, even if it was grouped to a surgical DRG, was not a major 
procedure because of the relatively short LOS at the acute care 
hospital, and, therefore, should have been provided ``under 
arrangements.''
    We note that after a reasonable and systematic examination of the 
data mentioned above, there are 459 surgical DRGs (less than 0.4 
percent of all cases). Additionally, the data revealed that the 
specific surgical DRGs into which the acute care treatments were 
grouped appear to arise directly from the principal diagnoses at the 
LTCH, a concern that we originally stated in the January 30, 2004 
proposed rule for the LTCH PPS when we described the ``under 
arrangements'' feature of the proposed 3-day or less interruption of 
stay policy (69 FR 4771).
    Table 13 shows examples drawn from the above cited subset of claims 
for July 1, 2004 through June 30, 2005.

[[Page 27873]]



                                Table 13
------------------------------------------------------------------------
                LTC-DRG                                DRGs
------------------------------------------------------------------------
182 (Esophagitis gastroenteritis, and    17 Other Digestive system
 miscellaneous other digestive            operating room procedures.
 disorders>17 w/cc.
271 Skin Ulcers........................  270 Other skin, subcutaneous
                                          tissue and breast procedures w/
                                          cc.
348 Prostatitis........................  336 Trans-urethral
                                          prostatectomy.
87 Pulmonary edema and respiratory       55 Miscellaneous ENT, mouth, or
 failure.                                 throat procedures.
418 Post-operative and post traumatic    415 Operating room procedure
 infections.                              for infectious or parasitic
                                          diseases.
144 Other circulatory system diagnosis   120 Other circulatory system
 w/cc.                                    operating room procedures.
------------------------------------------------------------------------

    The basic premise of a PPS recognizes that Medicare pays hospitals 
an amount per discharge based on the average costs of delivering care 
for that diagnosis (which is assigned a DRG), and that some cases 
require more hospital resources to be expended, where others, require 
less. Therefore, in some cases, Medicare payments will be lower than 
the hospital's costs, but in other cases, the payments will exceed the 
costs. In the January 30, 2004, LTCH PPS proposed rule, we stated that 
surgical treatment that is directly related to the principal diagnosis 
at the LTCH and which only required 3 days or less of care at the acute 
care hospital, should be provided by the LTCH either directly or 
``under arrangements'' since Medicare payment to the LTCH for this 
particular case was ``payment in full'' as specified in Sec.  
412.509(b) (69 FR 4771). It has been standard Medicare PPS policy for 
over two decades that the LTCH hospitalization, the surgical treatment 
arising from this hospitalization, and the post-operative stay at the 
LTCH are to be viewed as one episode of care and therefore, the LTC-DRG 
payment would be adequate compensation for the entire episode. (In 
fact, when LTCHs were paid under the reasonable cost-based TEFRA 
payment policy--subject to hospital-specific ceilings or `target 
amounts'--prior to the FY 2003 implementation of the LTCH PPS, the 
``under arrangements'' policy enabled LTCHs to include the costs 
incurred by the LTCH for these treatments on Medicare claims, thereby 
resulting in higher TEFRA target amounts.) However, when we restated 
the ``under arrangements'' policy for the 3-day or less interruption of 
stay, and proposed its codification in the RY 2005 proposed rule for 
the LTCH PPS, in response to comments received on the January 30, 2004 
proposed rule, we did agree to establish a 1-year exception to the 
``under arrangements'' feature of the 3-day or less interruption of 
stay policy for cases that grouped to a surgical DRG during an 
intervening acute care hospitalization. We subsequently extended this 
exception for an additional year to gather sufficient data with which 
to determine the value of retaining this exception to the general 
policy.
    Therefore, based on the above data analysis and under the broad 
discretionary authority granted by section 123 of the BBRA as amended 
by section 307(b) of the BIPA for the Secretary for the development and 
implementation of the LTCH PPS (including the ability to make 
appropriate adjustments); sections 1861(w)(1), 1862(a)(14), and 1871 of 
the Act; and Sec.  411.15 and Sec.  412.509 of the regulations, we are 
not renewing the surgical-DRG exception to the 3-day or less 
interruption of stay policy for LTCH PPS RY 2007. Under Sec.  412.531, 
with the sunsetting of this exception for LTCH PPS RY 2007, treatment 
at an acute care hospital that was grouped to a surgical DRG would be 
considered part of the LTCH stay and paid for by the LTCH ``under 
arrangements'' (see Sec.  412.509(c)). Our analytic sample of LTCH 
cases that included a 3-day or less interruption of stay that was 
governed by the surgical DRG exception, indicates that at least one-
half of the LTCH claims themselves included surgical care, despite the 
patient's discharge to the acute care hospital for treatment that was 
grouped to a surgical DRG and for which a separate claim was submitted 
to Medicare by the acute care hospital. Since typically, LTCHs do not 
perform significant surgical procedures, upon analyzing the data, CMS 
coders believe that some of the LTCH claims may inappropriately be 
including the surgical procedure performed during the prior acute care 
stay, complications from which led to the LTCH admission. If LTCHs are 
presently coding for the surgical procedures that are being delivered 
in the acute care hospital during a 3-day or less interruption of stay, 
in many of these cases they should be paying for this treatment ``under 
arrangements.'' Furthermore, in the cases where the same DRG is 
reported by both the LTCH and the acute care hospital treating the 
patient during the 3-day or less interruption, Medicare may be paying 
twice for the same treatment. In any event, the above scenarios are 
indicative of poor documentation in the medical record, poor coding, or 
gaming of the Medicare system.
    Because we believe LTCH's discharges are grouped to DRGs that are 
often reflective of the surgery, we do not believe that the surgical 
exception to the 3-day or less interruption of stay policy is ``* * * 
actively accomplishing our goal of reducing unnecessary Medicare 
payments and * * * deter[ing] unnecessary inappropriate Medicare 
payments while not compromising beneficiary access to medically 
necessary services'' (70 FR 24206). We are therefore discontinuing the 
policy for the surgical exception.
    However, there were cases among those that we reviewed that appear 
to have been accurately coded and that actually represented a LTCH 
patient whose LTCH treatment was interrupted by a surgery which 
entailed a 3-day or less inpatient stay at an acute care hospital for a 
problem unrelated to the on-going treatment at the LTCH. Once the 
sunsetting of the surgical DRG exception goes into effect, a LTCH will 
be responsible for paying the costs of surgical services performed at 
an acute care hospital ``under arrangements.'' However, at that point, 
the LTCH will be able to include that surgical procedure on its claim 
that will be submitted to Medicare even though the procedure was not 
provided to the patient directly by the LTCH. The presence of a 
significant surgical procedure on the claim may impact the LTC-DRG to 
which a case is assigned by the GROUPER software used by the FI in 
determining the amount that Medicare will pay for that case. However, 
there may be situations where the inclusion of the surgical procedure 
does not result in grouping the case to a higher-weighted LTC-DRG (and 
thus increase the Medicare payment). In these cases, we would emphasize 
that, since, as noted previously, the ``under arrangements'' policy was 
a feature of the previous TEFRA payment policy prior to the FY 2003 
implementation of the LTCH PPS, and costs of off-site surgeries were 
typically included in

[[Page 27874]]

LTCH claims, to the extent providers included those costs on their 
claims, these additional costs were included in the establishment of 
the LTCH PPS base rate.
    We would further note that we do not believe that the numbers of 
cases nationwide that would fall within the surgical DRG exception 
represent a significant financial burden for LTCHs to absorb over a 
cost-reporting period, given the nature of the LTCH PPS.
    We also believe that the LTCH PPS HCO policy at Sec.  412.525(a) 
will provide somewhat of a financial cushion for the LTCH in those very 
few cases where a LTCH patient whose hospitalization at the LTCH was 
interrupted for 3 days or less for a very costly surgical treatment at 
an acute care hospital. This is consistent with the HCO policy 
applicable for a costly non-surgical inpatient or outpatient treatment 
during a 3-day or less interrupted stay at an acute care hospital, an 
IRF, or for care at a SNF.
    Our further examination of the subset of the data indicates that 
the exception may be fostering confusion, perpetuating poor coding, and 
even encouraging gaming by creating a distinction within the well-
established Medicare ``under arrangements'' policy between surgical and 
non-surgical procedures and treatments delivered during an episode of 
hospital-level care. Moreover, we have discovered some LTCHs are 
including the surgical procedures performed at the acute care hospital 
during the interruption in their claims and therefore the LTCH 
hospitalizations are being grouped to surgical DRGs while claims for 
what appear to be the same surgeries are also being submitted by acute 
care hospitals. Use of the same surgical DRG in both the LTCH's claim 
for the case and the acute care hospital's claims for the surgery in 
some of these cases indicates that Medicare may be paying twice for the 
exact same operation, a situation directly contravened by sections 
1862(a)(14) and 1861(w)(1) of the Act, Sec.  411.15 and Sec.  412.509. 
Accordingly, we believe that based on our analysis of the data from the 
MedPAR files from all LTCH discharges occurring from July 1, 2004 
through June 30, 2005, the exception does not appear to have an overall 
beneficial effect on the program nor would its absence have a strong 
negative impact on LTCHs.
    In the RY 2006 LTCH PPS final rule (70 FR 24206), we also expressed 
concerns about whether our data would reveal an increase in the numbers 
of interruptions of 4 days, indicating an effort by certain LTCHs to 
side-step the ``under arrangements'' provisions of our 3-day or less 
interruption of stay policy. If the interruption in a LTCH patient's 
stay exceeds 3 days, under existing policy at Sec.  
412.531(b)(1)(ii)(B) and Sec.  412.531(c), payment would be governed by 
the greater than 3-day interruption of stay policy at Sec.  412.531(b) 
and Medicare would generate a separate payment to an intervening 
provider where the patient received treatment or care, thus discharging 
the LTCH from responsibility to pay for the acute care services ``under 
arrangements.'' Furthermore, an interruption in a LTCH stay in excess 
of 3 days, where the patient returns home but still receives outpatient 
treatment prior to returning to the LTCH, would result not only in 
separate Medicare payments for the outpatient care but would also 
result in an additional discharge payment to the LTCH since the greater 
than 3-day interruption of stay policy only applies to intervening 
acute care hospital, IRF, or SNF stays. We will be evaluating data from 
RY 2004 and RY 2005 on Medicare payments for services or care delivered 
during LTCH interruptions of stay of 4 days that would otherwise have 
been governed by the ``under arrangements'' feature of the 3-day or 
less interruption of stay policy at Sec.  412.531(b)(1)(ii)(A)(2) to 
determine whether an additional day is being arbitrarily added to the 
interruption prior to readmittance to the LTCH for purposes of 
thwarting the goal of the policy. We believe it may be appropriate in 
the future to propose a further revision to the 3-day or less 
interruption of stay provision and to establish another threshold.
    Comment: Commenters questioned whether the cost of these surgical 
cases were correctly reported under the TEFRA payment system, thus, 
making it questionable whether such costs were included in the LTCH PPS 
base period costs. Two commenters stated that the surgical procedures 
are not included in the current relative weights as coding for this 
care was never historically included by most LTCHs; thus, the proposal 
to discontinue the exception would inappropriately require LTCHs to 
care for vulnerable populations without adequate reimbursement. They 
recommend that we postpone our elimination of the surgical exception 
until such time as the costs can be accounted for in the DRG weights. 
Commenters also noted that one year of data is not adequate to 
eliminate this exception.
    Response: We note that under the TEFRA payment system, if a LTCH 
patient required tests and procedures that were unavailable at a LTCH, 
under section 1862(a)(14) of the Act, implemented in regulations at 
Sec.  411.15(m), the statute requires that they be provided ``under 
arrangements.'' Thus, if a LTCH patient required tests and procedures 
that were unavailable at the LTCH, we assume that the LTCH had provided 
those services ``under arrangements'' (and did not discharge the 
patient to another site of care and directly admit the patient 
following the off-site treatment) because that was the process required 
by the statute and regulations. Consequently, we believe that hospitals 
included the costs of medical services procured elsewhere ``under 
arrangements'' in a patient's Medicare claim. Under the TEFRA system, 
these additional costs would then have been included in the hospital 
target amount and would be paid for by Medicare. We expect that as 
responsible corporate entities, LTCHs take necessary steps to comply 
with Medicare regulations which they are required to follow through 
their provider agreements under Part 489. We presume that LTCHs, to the 
extent that they were following our regulations, would have included 
the costs of services furnished ``under arrangements'' in their cost 
reports.
    Data from FY 2000 and CY 2002 MedPAR files were analyzed to track 
patients discharged from a LTCH, admitted to other inpatient sites, 
which were followed by readmission to the LTCH. (We believe that the 
data we accumulated for these two years was more than adequate to base 
a decision for the surgical exception.) If tests and procedures were 
being provided for ``under arrangements,'' in compliance with our 
regulations, significant patient movement, that is, discharge from the 
LTCH followed by a subsequent readmission to the LTCH, would have been 
uncommon. Our data indicated that in FY 2000, only 1.1 percent of all 
Medicare LTCH patients were readmitted to a LTCH within 3 days of a 
discharge (912 cases out of 80,893 total cases) of which less than 700 
were treated in acute-care hospitals during the 3-day interruption. We 
believe that this data indicates that prior to the implementation of 
the LTCH PPS, the vast majority of LTCHs complied with the ``under 
arrangements'' regulations. Therefore, since the patient was not 
discharged to procure the service, but rather remained a LTCH patient, 
even though the LTCH moved the patient to another site for needed tests 
or care, those tests or care were provided ``under arrangements''. 
Accordingly, the costs of these services should be included in the 
patients' Medicare claims during those years and, thus, should have 
been

[[Page 27875]]

factored in when we were calculating our base rates for the LTCH PPS. 
Moreover, the charges included charges associated with these services, 
thus, allowing us to use this charge data when determining the LTC-DRG 
weights for the LTCH PPS.
    Comment: One commenter stated that any ``suggestion'' by CMS coders 
that the LTCH claims may be incorrect because some LTCH claims included 
surgical care and are grouped to surgical DRGs is a concern that can be 
dealt with on a case-by-case basis, without eliminating the surgical 
exception. Another commenter suggested that this concern regarding 
incorrect coding may be resolved by requiring greater participation in 
the coding clinics that are available, as well as working with both the 
QIO and the FIs to develop better coding skills. Another commenter 
stated that if we believe some of the problems are due to LTCH claims, 
including surgical procedures performed during the prior acute stay, 
then we should correct the problem through focused audits and not by 
eliminating this surgical exception.
    Response: As we have stated elsewhere in this document, our 
decision to discontinue the surgical DRG exception for the 3-day or 
less interruption of stay policy is based on the results of our 
analyses of claims data. Although we had agreed to provide for a 
temporary exception to the 3-day or less interrupted stay provision, we 
have now determined that it is no longer appropriate. On further 
examination of the data, we believe that this surgical exception caused 
some confusion, thus, perpetuating other problems (for example, 
coding). We disagree with the commenter's suggestion that we should 
address this issue by conducting coding clinics to improve coding 
skills. Based on the data described below, we believe the exception is 
not necessary even if LTCHs were to be ``educated'' as to proper coding 
techniques. As we stated previously in the RY 2006 LTCH PPS final rule, 
and as we reiterated in the RY 2007 LTCH PPS proposed rule (71 FR 
4692), ``* * * we will be analyzing claims data over the next year to 
determine whether the surgical DRG exception to the `under arrangement' 
feature of the 3-day or less interrupted stay policy is actively 
accomplishing our goal of reducing unnecessary Medicare payments and to 
deter inappropriate Medicare payments while not compromising 
beneficiary access to medically necessary services.'' Based on the 
analysis of this claims data, as well as our belief that this exception 
is not actively accomplishing our goals as stated above, we believe it 
is appropriate to discontinue the surgical exception to the 3-day or 
less interrupted stay policy. Furthermore, we do not agree with the 
commenters that addressing the problem of including the surgical 
procedure for those LTCHs that did not provide the service ``under 
arrangements'' is an appropriate use of the limited QIO budget.
    Comment: Several commenters opposed the elimination of the surgical 
DRG exception because they strongly believe that the cost of these 
surgical DRG cases should not be left to the LTCHs. Moreover, one 
commenter stated that eliminating the surgical exception along with 
other reductions throughout this final rule will certainly have a 
strong negative impact on LTCHs and their ability to be able to 
continue to provide services. Another commenter stated that it was 
unfair for CMS to apply some significant financial changes and expect 
LTCHs to continue to shoulder higher unreimbursed costs. One commenter 
suggested that a one-time adjustment be made to include the additional 
cost to pay for these services ``under arrangement'' in the standard 
Federal rate. Commenters also noted that a statement was made that the 
number of cases involved with the surgical exception represents only a 
small number of LTCH hospitalizations and therefore these cases ``* * * 
would not represent a significant financial burden for LTCHs to absorb 
over a cost-reporting period, given the nature of the LTCH PPS.'' They 
believe that this statement is not a valid reason for CMS to eliminate 
the surgical exception.
    Response: With regard to the commenters' concerns that our 
elimination of the surgical exception would place undue financial 
burden on LTCHs, we note that, previously, under the TEFRA payment 
system, LTCHs were required to provide all necessary patient care, 
either directly or ``under arrangements.'' It has been standard 
Medicare PPS policy for over two decades that the LTCH hospitalization, 
the surgical treatment arising from this hospitalization, and the post-
operative stay at the LTCH are to be viewed as one episode of care. 
Therefore, the LTC-DRG payment would be adequate compensation for the 
entire episode of patient care.
    As we have discussed previously in this final regulation, we stated 
that we would ``be analyzing claims data over the next year to 
determine whether the surgical DRG exception to the `under arrangement' 
feature was accomplishing the goal of reducing unnecessary Medicare 
payments and to deter inappropriate Medicare payments while not 
compromising beneficiary access to medically necessary services'' (71 
FR 4692). CMS analyzed claims from MedPAR files for LTCH discharges 
from July 1, 2004 through June 30, 2005 and performed the analysis 
necessary for evaluating the impact of the surgical DRG exception to 
the 3-day or less interruption of stay policy. As a result of the above 
data analyses, we are discontinuing the surgical exception to the 3-day 
or less interruption of stay policy because we do not believe that the 
surgical exception to the 3-day or less interruption of stay policy is 
``* * * actively accomplishing our goal of reducing unnecessary 
Medicare payments and * * * deter[ing] unnecessary inappropriate 
Medicare payments while not compromising beneficiary access to 
medically necessary days'' (70 FR 24206).

B. Special Payment Provisions for LTCH Hospitals Within Hospitals 
(HwHs) and LTCH Satellites

    In the IPPS final rule for FY 2005, when we established the special 
payment provisions at Sec.  412.534 for LTCHs that were HwHs or were 
satellites of LTCHs, we were seeking, in part, to address the on-going 
proliferation of LTCHs that were HwHs or satellites. (OSCAR files 
report that there were 105 LTCHs in 1993, of which 10 were HwHs. In 
October 2005, there were 373 LTCHs, many of which are HwHs.) We were 
particularly concerned with patient shifting between the host hospitals 
and the LTCH HwH or satellite for financial rather than for medical 
reasons (69 FR 49191) and with the resulting inappropriate increased 
cost to the Medicare system.
    In that PPS final rule, we quoted the FY 1995 IPPS final rule where 
we first discussed the concern that LTCH HwHs were, in effect, 
operating as step-down units of acute care hospitals. We explained that 
this was inconsistent with the statutory framework and that such a 
configuration could lead to two Medicare bills being submitted and paid 
(one from the acute care hospital and the other from the LTCH) for what 
was essentially one episode of care (69 FR 49191, 59 FR 45389). When we 
established the separateness and control criteria for LTCH HwHs at 
Sec.  412.22(e) in the FY 1995 IPPS final rule, our main objective was 
to protect the integrity of the IPPS by ensuring that those costly, 
long-stay patients who could reasonably continue treatment in that 
setting would not be unnecessarily discharged to an onsite LTCH, a 
behavior that would skew and undermine the Medicare IPPS DRG system. We 
explained that the

[[Page 27876]]

Federal standardized payment amount for the IPPS was based on the 
average cost of an acute care patient across all acute care hospitals. 
This assumes that, on average, both high-cost and low-cost patients are 
treated at a hospital. Although Medicare might pay a hospital less than 
was expended for a particular case, over a period of time, the hospital 
would also receive more than was expended for other cases. However, an 
acute care hospital that consistently discharges higher cost patients 
to a post-acute care setting for the purpose of lowering its costs 
undercuts the foundation of the IPPS DRG system, which is based on 
averages. In this circumstance, the hospital inappropriately would have 
incurred lower costs under the IPPS because the course of acute 
treatment was not completed and the hospital did not incur those 
additional costs for the remainder of the patient's stay at the IPPS 
acute care hospital. Once that patient is discharged from the IPPS 
acute care hospital to the LTCH, the patient, still under active 
treatment for an acute illness, will be admitted to a LTCH, thereby 
generating a second admission and Medicare payment that would not have 
taken place but for the fact of co-location (59 FR 45389).
    As explained previously, there was and continues to be concern that 
the LTCH HwH/host configuration could result in patient admission, 
treatment, and discharge patterns that are guided more by attempts to 
maximize Medicare payments than by patient welfare. To establish a 
clear division between a host hospital and an on-site LTCH where the 
linking of an IPPS hospital and a LTCH could lead to two Medicare 
payments for what was essentially one episode of patient care, we 
issued ``separateness and control'' regulations in that FY 1995 IPPS 
Final Rule at (former) Sec.  412.23(e), for LTCHs that were seeking to 
co-locate with acute care hospitals as HwHs (59 FR 45390). In the 
ensuing decade, we revisited the issue of HwHs several times (for 
example, 60 FR 45836, 62 FR 46012, 67 FR 56010, and 68 FR 45462), 
during which we clarified and amplified the separateness and control 
requirements. In the FY 1998 IPPS final rule, we extended the 
application of these rules beyond LTCHs to include other classes of 
facilities that might seek exclusion from the IPPS as HwHs, such as 
IRFs (although the vast majority of HwHs have continued to be LTCHs) 
(62 FR 46014). Additionally, although our original regulations for HwHs 
focused solely on the relationship between a LTCH HwH and an acute care 
host hospital, and this is still, by far, the most common 
configuration, nothing in the regulations precludes other types of 
hospitals, for example, IRFs, from establishing HwHs (69 FR 49198).
    In addition, in the FY 1998 IPPS final rule, we established a 
``grandfathering'' provision for HwHs in existence prior to September 
30, 1995 at Sec.  412.22(f), and in the FY 2004 IPPS final rule we 
clarified and codified the requirements for ``grandfathered'' HwHs (68 
FR 45463). We believed at that time that these rules were sufficient 
solutions to our concerns about LTCH HwHs functioning as long-stay 
units of acute care host hospitals.
    Therefore, prior to FY 2005, a HwH was required to meet the 
separateness and control criteria set forth at Sec.  412.22(e). To be 
excluded from the IPPS, the HwH had to have a separate governing body, 
a separate chief medical officer, a separate medical staff, and a 
separate chief executive officer. Regarding the performance of basic 
hospital functions (former Sec.  412.22(e)(5)), the hospital had to 
meet at least one of the following criteria: (1) The hospital performs 
the basic functions through the use of employees or under contracts or 
other agreements with entities other than the hospital occupying space 
in the same building or on the same campus, or a third entity that 
controls both hospitals; (2) for the same period of at least 6 months 
immediately preceding the first cost reporting period for which 
exclusion is sought, the cost of the services that the hospital 
obtained under contracts or other agreements with the hospital 
occupying space in the same building or on the same campus, or with a 
third entity that controls both hospitals, is no more than 15 percent 
of the hospital's total inpatient operating costs, as defined in Sec.  
412.2(c) (inpatient operating costs include operating costs for routine 
services, such as costs of room, board, and routine nursing services; 
operating costs for ancillary services, such as laboratory or 
radiology; special care unit operating costs; malpractice insurance 
costs related to serving inpatients; and preadmission services); or (3) 
for the same period of at least 6 months immediately preceding the 
first cost reporting period for which exclusion is sought, the hospital 
had an inpatient population of whom at least 75 percent were referred 
to the hospital from a source other than another hospital occupying 
space in the same building or on the same campus or with a third entity 
that controls both hospitals.
    It was our experience that the vast majority of HwHs elected to 
meet the second of the three criteria at Sec. A412.22(e)(5), that is, 
the cost of the services that the hospital obtained from the co-located 
hospital or with a third entity that controls both hospitals could be 
no more than 15 percent of its total inpatient operating costs.
    As detailed in the FY 2005 proposed rule and final rule for the 
IPPS (69 FR 28323 through 28327, 69 FR 49191 through 49214), with the 
noted explosive growth in the number of LTCHs, (and with LTCH HwHs, in 
particular) and concomitant costs to the Medicare program, we 
reevaluated the effectiveness of existing policies regarding HwHs 
insofar as whether they sufficiently protected the Medicare program 
from the problems that we envisioned in the FY 1995 IPPS final rule and 
subsequent rules. We also questioned the effectiveness of the 
``separateness and control'' requirements alone because entities have 
used complex arrangements among corporate affiliates, and obtained 
services from those affiliates, thereby impairing or diluting the 
separateness of the corporate entity. While technically remaining 
within the parameters of the rule, these arrangements were 
intermingling corporate interests so that the corporate distinctness 
had been lost.
    In accordance with notice and comment rule-making and following 
serious consideration of the public comments that we received on our 
proposed policy revisions for LTCH HwHs, regulatory changes were 
finalized for HwH separateness and control policies at Sec.  412.22(e) 
and a new payment adjustment at Sec.  412.534 was established for LTCH 
HwHs and satellites of LTCHs in our FY 2005 IPPS final rule (69 FR 
49191 through 49214).
    Specifically, for cost reporting periods beginning on or after 
October 1, 2004, for LTCHs we eliminated the 15 percent test under then 
existing Sec.  412.22(e)(5)(ii), the performance of basic hospital 
functions test under former Sec.  412.22(e)(5)(i) and the 75 percent of 
admissions from other than the host criteria at former Sec.  
412.22(e)(5)(iii) for LTCH HwHs. If a LTCH demonstrated compliance with 
the medical and administrative separateness and control policies at 
Sec.  412.22(e)(1)(i) through (e)(1)(iv) under our finalized policy, it 
satisfied the LTCH HwH requirements. We additionally established a 
payment adjustment for LTCH HwHs (and also for satellites of LTCHs) at 
Sec.  412.534, which we believed addressed our on-going concerns 
regarding the relationship between LTCH discharges who were admitted 
from the host hospital. We included LTCH satellites in this payment 
adjustment because we

[[Page 27877]]

believed that the co-location of a host hospital and a LTCH satellite 
may result in the same incentives for inappropriate patient movement as 
exist for hosts and LTCH HwHs.
    The payment adjustment at Sec.  412.534, Special payment provisions 
for long-term care HwHs and satellites of LTCHs, mandates that if a 
LTCH HwH's or LTCH satellite's discharges that were admitted from its 
host hospital exceed 25 percent (or the applicable percentage) of its 
total Medicare discharges for the LTCH HwH's or LTCH satellite's cost 
reporting period, an adjusted payment would be made. The adjustment 
would be the lesser of the otherwise payable amount under the LTCH PPS 
or the LTCH PPS amount that was equivalent to what Medicare would 
otherwise pay under the IPPS. In determining whether a hospital 
exceeded the 25 percent criterion, patients transferred from the host 
hospital that have already qualified for HCO payments at the host would 
not count as part of the host's 25 percent (or the applicable 
percentage) and therefore, the payment would not be subject to the 
adjustment. Those patients would be eligible for otherwise unadjusted 
payment under the LTCH PPS. Discharged Medicare patients that were 
admitted from the host before the LTCH HwH or LTCH satellite crosses 
the 25 percent threshold would be paid an otherwise unadjusted payment 
under the LTCH PPS.
    We also finalized additional adjustments to the 25 percent policy 
for specific circumstances. For LTCH HwHs or LTCH satellites located in 
a rural area, instead of the 25 percent criterion, the payment 
adjustment would be imposed if the majority (that is, more than 50 
percent) of the Medicare patients discharged from the LTCH HwH or LTCH 
satellite were admitted from the host. In addition, in determining the 
percentage of Medicare patients discharged from the LTCH HwH or LTCH 
satellite that were admitted from the rural host, any patients that had 
been Medicare outliers at the host and then were discharged to the LTCH 
HwH or LTCH satellite would be considered as if they were admitted to 
the LTCH from a non-host hospital. Furthermore, for urban single or MSA 
dominant hospitals, we would allow the LTCH HwH or LTCH satellite to 
discharge Medicare patients that were admitted from the host up to the 
host's percentage of total Medicare discharges for like hospitals in 
the MSA. We would apply a floor of 25 percent and a ceiling of 50 
percent to this variation. In addition, in determining the percentage 
of discharged Medicare patients that were admitted to the LTCH HwH or 
LTCH satellite from the urban single or MSA dominant host hospital, any 
patients that had been Medicare outliers at the host and then 
transferred to the LTCH HwH or LTCH satellite would be considered as if 
they were admitted to the LTCH from a non-host hospital.
    We also provided a 4-year transition for existing LTCH HwHs or LTCH 
satellites for the purpose of providing a reasonable period during 
which the host and the LTCH HwH or LTCH satellite would be able to 
adapt to the requirements of the new policy. Also included in this 
transition policy were LTCHs under formation that satisfied the 
following two-prong requirement: (1) the hospital was paid under the 
provisions of subpart O of part 412 on October 1, 2005, and (2) the 
hospital's qualifying period under Sec.  412.23(e) began on or before 
October 1, 2004. For cost reporting periods beginning on or after 
October 1, 2004 through September 30, 2005, these hospitals were to be 
grandfathered, with the first year as a ``hold harmless'.
    However, we required that even for grandfathered facilities, in the 
first cost reporting period, the hold harmless year, the percentage of 
Medicare discharges admitted from the host hospital to the LTCH HwH or 
LTCH satellite could not exceed the percentage of discharges admitted 
from the host hospital to the LTCH in its FY 2004 cost reporting 
period. Therefore, while we grandfathered existing LTCH HwHs and 
allowed for a 4-year transition, beginning on or after October 1, 2004 
and before October 1, 2005 (FY 2005), those hospitals could not 
increase the percentage of discharges admitted from the host in excess 
of the percentage that they had admitted in FY 2004.
    After the first grandfathered cost reporting period, the 
grandfathered LTCH HwHs and LTCH satellites were required to meet an 
increasing percentage threshold over the next 3 years beginning in FY 
2006. For the second year (cost reporting periods beginning on or after 
October 1, 2005 but before October 1, 2006), the applicable percentage 
of discharges admitted from the host with no payment adjustment would 
be the lesser of the percentage of their discharges admitted from their 
host for their FY 2004 cost reporting period or 75 percent. For the 
third year (cost reporting periods beginning on or after October 1, 
2006 but before October 1, 2007), the applicable percentage of 
discharges admitted from the host with no payment adjustment would be 
the lesser of the percentage of their discharges admitted from their 
host for their FY 2004 cost reporting period or 50 percent, and finally 
25 percent (or other applicable percentage) beginning with the third 
year (cost reporting periods beginning on or after October 1, 2007).
    These finalized payment policies and the concerns that they address 
echo concerns first expressed in the FY 1995 final rule for the IPPS, 
when we began to regulate new entities that we named ``hospitals within 
hospitals''. As noted elsewhere in this preamble, the reason that we 
proposed the changes in the criteria for LTCH HwH qualification at 
Sec.  412.22(e) in the FY 2005 IPPS proposed rule (69 FR 28323 through 
28327) was the nexus between these concerns and the explosive growth in 
the numbers of LTCH HwHs. Furthermore, as detailed in the FY 2005 IPPS 
final rule (69 FR 49201), these regulations were grounded in a thorough 
review of the available data as well as exhaustive policy evaluations.
    As we stated in the RY 2007 LTCH PPS proposed rule (71 FR 4648), as 
a result of our monitoring efforts to date (see section XI. of the 
preamble to this final rule), we have become increasingly aware that 
the intent of our existing policy is being thwarted by creative 
patient-shifting in some communities where there is more than one LTCH 
HwH or LTCH satellite. We have come to understand, based upon specific 
inquiries from LTCHs and their attorneys or agents, and also from 
questions posed by our fiscal intermediaries (FIs), that some host 
hospitals within the same community are arranging to cross-refer to 
another's co-located LTCH (HwH or satellite). This behavior circumvents 
the intent of the payment adjustment which was to hinder the de facto 
establishment of a LTCH unit of a host hospital, which is precluded by 
law, and to discourage inappropriate patient-shifting between a host 
and a LTCH HwH or satellite. This practice also undermines the basic 
premise of the IPPS DRG classification system and generates 
inappropriate Medicare payments. Another attempt to circumvent the 
present regulation at Sec.  412.534 is a situation wherein a LTCH (that 
is co-located with a host as a HwH or satellite) admits a patient from 
the host, provides treatment, then transports the patient to another 
location of that LTCH (a free-standing hospital or another HwH or 
satellite not co-located with the host hospital) for special treatment, 
after which the patient is discharged from that other location. Since 
the payment adjustment is being implemented on a location-specific 
basis, we believe that this ``transporting'' of the patient to another 
site is an attempt to side-step the

[[Page 27878]]

location-specific feature of the existing payment adjustment. We 
expressed considerable concern about attempts to game Medicare by 
circumventing the intent of the 25 percent (or applicable percentage) 
patient threshold payment adjustment at Sec.  412.534.
    In addition, as a result of implementing the payment adjustment at 
Sec.  412.534 for patients exceeding the 25 percent (or applicable 
percentage) threshold for LTCH HwHs and satellites of LTCHs, the most 
recent growth in the LTCH universe is occurring with the development of 
free-standing LTCHs. Many of these facilities receive patients from one 
referring hospital and as is the case with host/HwH or satellite 
configurations, we are concerned that these non-co-located LTCHs may, 
in fact, be functioning like a long-stay unit of those referring 
hospitals.
    As we first stated in the FY 1995 IPPS final rule, ``we agree that 
the extent to which a facility accepts patients from outside sources 
can be an important indicator of its function as a separate facility, 
not merely a unit of another hospital. In general, a facility's 
functional separateness should be reflected in its ability to attract 
patients from sources other than the hospital that it serves. For 
example, if a facility receives all (or nearly all) of its admissions 
independently (that is, from outside sources), it can reasonably be 
assumed to be functioning separately from the host hospital (59 FR 
45391).'' In establishing the concept of ``functional separateness'' in 
the above quote from the FY 1995 IPPS final rule, we were identifying a 
broader phenomenon than just the relationship between a host acute care 
hospital and a LTCH HwH or satellite of a LTCH. As noted below, this 
concern has been communicated to us from a variety of sources.
    MedPAC's comments on the proposed payment adjustment for LTCH HwHs 
in the FY 2005 IPPS proposed rule focused directly on this issue and 
expressed concern that the 25 percent patient threshold policy would 
have a significant impact and could possibly lead to an inequitable 
situation for co-located LTCHs as compared to freestanding LTCHs. Among 
its concerns were the following: that freestanding LTCHs also have 
strong relationships with acute care hospitals, and that where on 
average LTCH HwHs receive 61 percent of their patients from their 
hosts, freestanding LTCHs receive 42 percent from their primary 
referring hospital; that a 25 percent rule that only applies to LTCH 
HwHs and not to freestanding LTCHs may therefore be inequitable; and 
furthermore, that this approach may be circumvented by an increase in 
the number of freestanding LTCHs instead of LTCH HwHs (69 FR 49211).
    In discussion with a LTCH trade association, we were informed of a 
study that it commissioned from the Lewin Group that included a 
percentage breakdown of patients referred to free-standing (for 
example, non-co-located) LTCHs (and other post-acute providers) from 
``single-source acute hospitals.'' According to the association, the 
data indicated ``'that it is common practice for LTCHs `` to admit 
patients from single-source acute care hospitals'' and that 71.2 
percent of free-standing LTCHs admit more than 25 percent of their 
patients from a single source acute-care hospital.
    We are also anecdotally aware of the existence of frequent 
``arrangements'' in many communities between Medicare acute and post-
acute hospital-level providers that may not have any ties of ownership 
or governance relating to patient shifting that are based on mutual 
financial advantage rather than on significant medical benefits for a 
patient.
    In our response to the MedPAC comment, we stated that ``[w]hile we 
also understand the reservations expressed in the comments, we want to 
emphasize that `` we are establishing these revised payment policies in 
this final notice for LTCH HwHs or satellites and not freestanding 
LTCHs because of the considerable growth in the number of LTCH HwHs and 
because, ever since we first became aware of the existence of LTCH HwHs 
in 1994, we have been mindful of the strong resemblance that they bore 
to LTCH units of acute care hospitals, a configuration precluded by 
statute (69 FR 49211).''
    Notwithstanding this response and the finalized payment adjustment 
at Sec.  412.534, which focused solely on LTCH HwHs and satellites of 
LTCHs, we took considerable note of these comments and the specific 
information that they included. Since the October 1, 2004 
implementation of the payment adjustment for LTCH HwHs and satellites 
of LTCHs at Sec.  412.534, through our LTCH PPS monitoring initiative 
(see Section XI.), we have become aware that the growth in the LTCH 
universe is now occurring through the development of free-standing 
LTCHs. As of October 2005, there were 376 LTCHs in our OSCAR database, 
of which 201 are reported as freestanding (for example, not co-located 
with another Medicare hospital-level provider) and 175 of which are 
HwHs. But since October 1, 2004, of the 25 new LTCHs established, 22 
are free-standing. We have been informed directly that at least one 
particular LTCH chain that formerly specialized in the establishment of 
HwHs and satellites is now concentrating on the development of free-
standing LTCHs. Reviews of public documents posted at the corporate 
website and analysis of the expected consequences of the policy at 
other investor-oriented sites describe a focus on building free-
standing LTCHs, which we believe may imply a response to the payment 
adjustment for co-located LTCHs established under Sec.  412.534.
    We believe that this information indicates that the concerns that 
we expressed about the explosive growth in the number of LTCHs has 
shifted because of the implementation of the payment adjustment at 
Sec.  412.534 from the development of co-located LTCHs as HwHs or 
satellites of LTCHs to the establishment of free-standing LTCHs.
    We further conducted our own data analysis of sole-source (for 
example, one hospital referring to one LTCH) relationships between 
acute care hospitals and non-co-located LTCHs. The FY 2004 and FY 2005 
MedPAR files indicate 63.7 percent of the 201 free-standing LTCHs have 
at least 25 percent of their Medicare discharges admitted from a sole 
acute care hospital; for 23.9 percent of the freestanding LTCHs, the 
percentage is 50 percent or more; and for 6.5 percent, 75 percent or 
more of their Medicare discharges are admitted from a sole acute care 
hospital.
    Therefore, we believe that the danger of LTCHs functioning as 
``units'' appears to be occurring not only in LTCH HwHs and LTCH 
satellites but also with free-standing LTCHs, and that in many cases, 
these non-co-located LTCHs and their sole referral source may be 
functioning in ways that appear to have erased the line of ``functional 
separateness'' between these LTCHs and their referring acute care 
hospitals. We are concerned about these situations and in this context, 
we continue to believe that ``* * * the extent to which a facility 
accepts patients from outside sources can be an important indicator of 
its function as a separate facility, not merely a unit of another 
hospital (59 FR 45391).''
    We believe that our analysis of the available data and our 
awareness of growth patterns and behavioral changes in the LTCH 
industry corroborate the concerns expressed in correspondence and 
comments, but particularly in MedPAC's comments on our proposed payment 
adjustment for co-located LTCHs in the FY 2004 IPPS final rule (69 FR 
49211). In addition, the spiked increase in the number of free-standing 
LTCHs and their admission patterns

[[Page 27879]]

appear to confirm MedPAC's concerns that the industry may be 
circumventing the intent of the payment adjustment policy at Sec.  
412.534 aimed at combating LTCHs functioning as ``units'' by creating 
free-standing LTCHs instead of LTCHs co-located as HwHs or satellites.
    As we note previously in this final rule, we are keenly aware of 
the explosive growth in the number of free-standing LTCHs. 
Specifically, we are continuing to analyze patient claims data for 
acute care patients who are admitted to free-standing LTCHs for 
discharge and LOS information to evaluate whether Medicare is paying 
twice for what would essentially be one episode of care. We are 
considering appropriate adjustments to address this issue.
    Furthermore, we want to emphasize that we are closely monitoring 
patient shifting activities between host hospitals and LTCH HwHs or 
LTCH satellites, paying particular attention to evidence of 
inappropriate cross-referrals. We believe that a pattern of this 
behavior by hospitals would indicate an attempt to side-step the 
requirements of Sec.  412.534 and could warrant an investigation by 
HHS's Office of the Inspector General.
    Under Sec.  412.534 for LTCH cost reporting periods beginning on or 
after October 1, 2004, we published the existing payment adjustment 
detailed above for LTCH HwHs and LTCH satellites that focused on the 
percentage of Medicare patients being shifted from host hospitals to 
co-located LTCHs. Under this provision, we specified that if greater 
than 25 percent (or the appropriate percentage) of a LTCH HwH's or LTCH 
satellite's discharges during any cost reporting year were admitted 
from a host hospital, a payment adjustment would be applied to those 
discharges that exceeded the applicable threshold percentage (unless 
those patients had reached HCO status at the host hospital as specified 
in Sec.  412.534(c)). (For LTCHs that qualified under Sec.  412.534(f), 
we established a 4-year transition to the full payment adjustment.) 
Specifically, this payment adjustment provides that Medicare will pay 
the lesser of the amount otherwise payable under the LTCH PPS or a LTCH 
PPS payment amount equivalent to what would be paid under the IPPS for 
discharges in excess of the threshold amount.
    It has come to our attention that the phrase ``an amount equivalent 
to the amount that would otherwise be determined under the rules at 
subpart A, Sec.  412.1(a)'', that is, the IPPS, in the existing Sec.  
412.534(c)(2), (d)(1), and (e)(1) and our specific interpretation of 
its implementation may not be entirely apparent. Therefore, we 
clarified in the proposed rule that, as explained below in this 
section, the use of the term ``equivalent'' does not necessarily mean 
precisely equal. We are also codifying the formula that we currently 
use to give effect to this phrase in existing Sec.  412.534, described 
in this final rule, for purposes of administrative clarity.
    To clarify the meaning of the term ``equivalent,'' we emphasize 
that we chose that word rather than ``equal'' when referring to the 
amount payable under this subpart (the amount that is equivalent to the 
* * * amount that would be otherwise determined under the rules at 
subpart A, Sec.  412.1(a)). The term ``equivalent'' was used in this 
regulation because, although it was and continues to be our intent to 
include a payment adjustment under the LTCH PPS that closely resembles 
what an IPPS payment would have been for the same episode of care, 
several features of the IPPS cannot be translated directly into the 
LTCH PPS. Therefore, we believed that the term ``equivalent'' supports 
the ultimate goals of the policy adjustment, while also allowing for a 
reasonable and equitable implementation. For example, under the IPPS, 
payments for IME are limited based on the hospital's IME FTE resident 
cap. The hospital's IME FTE resident cap is determined based on the 
number of FTE residents counted by the hospital for purposes of IME on 
its base year (usually 1996) cost report. In the case of a LTCH, since 
it would not have reported any FTE residents for IME on the base year 
cost report, it would not be appropriate to apply the IPPS IME rules 
literally in the context of this LTCH PPS payment adjustment.
    We use the term ``equivalent'' in Sec.  412.534(c)(2), (d)(1), and 
(e)(1) because we believe this language accurately reflects our intent 
to utilize and build upon IPPS payment principles to develop a payment 
adjustment under the LTCH PPS that approximates for LTCHs the payment 
for a particular case that would have been made under the IPPS. For 
example, in the case of a LTCH that is a teaching hospital, if a 
particular LTCH discharge is governed by the 25 percent payment policy 
adjustment set forth at Sec.  412.534, we would determine the IPPS-
equivalent IME payment adjustment under the LTCH PPS by imputing an IME 
FTE resident cap based on the LTCH's direct GME cap (which would have 
been determined for a LTCH that has residency programs as set forth at 
Sec.  413.79(c)(2)) and using that imputed IME FTE resident cap to 
calculate an IME payment adjustment for this LTCH. We believe this 
methodology is reasonable since it is based on the best available data 
on residency programs at LTCHs. Using an imputed IME FTE resident cap 
could enable us to factor an adjustment for indirect costs of residency 
programs into a Medicare payment under the payment adjustment at Sec.  
412.534 for those cases in excess of the 25 percent (or applicable 
percentage) threshold where the Medicare payment would be based on an 
amount under the LTCH PPS equivalent to what would otherwise be paid 
under the IPPS.
    As explained previously, we are codifying the formula we use to 
give effect to the phrase ``an amount under subpart O that is 
equivalent to what otherwise would be paid under the IPPS.'' The 
existing regulations at Sec.  412.534(c)(2), (d)(1), and (e)(1) 
establish the applicable payment adjustment for LTCH HwHs and 
satellites not subject to the transition established under Sec.  
412.534(f) for cost reporting periods beginning on or after October 1, 
2004 and for cost reporting periods beginning on or after October 1, 
2007 for those LTCH HwHs and LTCH satellites that will be transitioning 
to the full adjustment. Under those provisions, Medicare will pay for 
patients discharged from a LTCH HwH or LTCH satellite that were 
admitted from their host hospital in excess of the 25 percent (or 
applicable percentage) threshold based upon the lesser of the amount 
otherwise payable under the LTCH PPS or the amount payable under this 
subpart that is equivalent to the amount that would otherwise be 
payable under the IPPS. The paragraphs below detail the specific 
payment features of the IPPS that we use and are codifying in 
regulation for administrative efficiency to allow Medicare to generate 
a fair and equitable ``equivalent'' IPPS payment under the LTCH PPS for 
those LTCH discharges governed by the payment adjustment at Sec.  
412.534.
    In the discussion that follows, we use phrases such as ``IPPS DRG 
relative weights,'' the ``IPPS HCO'' and the ``IPPS fixed loss amount'' 
in describing features of the IPPS that we use and build upon in the 
LTCH PPS to make appropriate adjustments when calculating LTCH payments 
for LTCH HwHs and LTCH satellites. However, we want to emphasize that 
such a payment is not an IPPS payment, but rather, is a payment under 
the LTCH PPS that is equivalent to a payment that would be derived from 
the IPPS payment methodology.
    As was proposed in the RY 2007 LTCH PPS proposed rule (71 FR 4648), 
we are codifying in regulations that an amount payable under this 
subpart that

[[Page 27880]]

is equivalent to what would otherwise be paid under the IPPS for the 
costs of inpatient operating services would be based on the 
standardized amount determined under Sec.  412.64(c), adjusted by the 
applicable IPPS DRG weighting factors as specified in Sec.  412.64(g). 
This amount would be further adjusted for area wage levels using the 
applicable IPPS labor-related share based on the CBSA where the LTCH is 
physically located set forth at Sec.  412.525(c), and the IPPS wage 
index for non-reclassified hospitals published in the annual IPPS final 
rule. (In the FY 2005 LTCH PPS final rule (70 FR 24200), we discuss the 
inapplicability of geographic reclassification procedures for LTCHs.) 
For LTCHs located in Alaska and Hawaii, this amount would also be 
adjusted by the applicable COLA factors used under the IPPS. 
Furthermore, for LTCH discharges governed by this payment adjustment, 
an amount payable under subpart O that is equivalent to what would 
otherwise be paid under the IPPS for the costs of inpatient operating 
services would also include, where applicable, a DSH adjustment (Sec.  
412.106) and where applicable, an IME adjustment (as discussed at Sec.  
413.79(c)(2)).
    Additionally, to arrive at a LTCH PPS payment amount equivalent to 
what would otherwise be payable under the IPPS, a LTCH would also be 
paid under the LTCH PPS for the costs of inpatient capital-related 
costs, using the capital Federal rate determined under Sec.  
412.308(c), adjusted by the applicable IPPS DRG weighting factors under 
Sec.  412.312(b). This amount would be further adjusted by the 
applicable geographic adjustment factors set forth at Sec.  412.316, 
including local cost variation (based on the IPPS wage index for non-
reclassified hospitals published in the annual IPPS final rule), large 
urban location, and COLA, if applicable.
    For discharges governed by this payment adjustment under the LTCH 
PPS, an amount payable under subpart O that is equivalent to an amount 
that would otherwise be paid under the IPPS for the inpatient capital-
related costs would also include a DSH adjustment (Sec.  412.320), if 
applicable, and an equivalent IME adjustment (Sec.  412.322), if 
applicable.
    A LTCH PPS payment amount equivalent to what would be paid under 
the IPPS would be determined based on the sum of the amount equivalent 
to what would be paid under the IPPS inpatient operating services and 
the amount equivalent to what would be paid under the IPPS for 
inpatient capital-related costs. This is necessary since, under the 
IPPS, there are separate Medicare rates for operating (subpart D of 
part 412) and capital (subpart M of part 412) costs to acute care 
hospitals, while under the LTCH PPS, there is a single payment rate for 
the operating and capital costs of the inpatient hospital's services 
provided to LTCH Medicare patients.
    We note that in section VI.A.1. of this final rule, we have added 
an additional component to the SSO payment adjustment at Sec.  
412.529(c)(2)(iv) that is based on an amount ``comparable'' to what 
would otherwise be paid under the IPPS, rather than an amount 
``equivalent'' under the existing payment adjustment at Sec.  412.534. 
Although the new payment adjustment option under the SSO policy was 
adapted from the existing LTCH HwH and LTCH satellite payment 
adjustment at Sec.  412.534, it also preserves a distinction in the 
existing SSO policy established at the start of the LTCH PPS for FY 
2003: The use of the LTCH PPS fixed loss amount should a SSO case also 
qualify for HCO payments after the SSO payment amount is determined. In 
contrast, as noted previously, under the payment adjustment for LTCH 
HwHs and LTCH satellites at Sec.  412.534, if the amount payable by 
Medicare for a specific discharge was the amount under subpart O that 
is equivalent to what would be otherwise payable under the IPPS and the 
case also qualified as a HCO, the outlier payment for this case under 
the LTCH PPS would be based on the IPPS HCO policy at Sec.  412.80(a) 
because the resulting payment would then be more equivalent to what 
would have been payable under the IPPS. Similarly, if under this 
payment adjustment the lesser amount resulted in an ``otherwise payable 
amount under the LTCH PPS,'' and the stay qualified as a HCO, Medicare 
would generate a HCO payment governed by the LTCH PPS fixed loss amount 
calculated under Sec.  412.525(a). If the estimated cost of the case 
exceeds the adjusted LTC-DRG plus a fixed loss amount under Sec.  
412.525(a), the LTCH would receive an additional payment based on the 
LTCH PPS HCO policy.
    Therefore, although there are significant similarities between the 
two payment adjustments, as detailed in section VI.A.1 of this final 
rule, there is a distinction between them regarding the computation of 
any applicable HCO payments. Under the LTCH HwH and satellite payment 
adjustment at Sec.  412.534, payment for discharges governed by the 
policy will be ``the lesser of the amount otherwise payable under this 
subpart [subpart O] or the amount that is otherwise payable under this 
subpart that is equivalent to the amount that would be otherwise 
payable under Sec.  412.1(a) [the IPPS].'' From an implementation 
standpoint, Medicare would generate an applicable payment to the LTCH 
for this discharge (which could include a HCO payment), but this 
payment would be subject to reconciliation at the end of the LTCH's 
cost reporting period when it would be determined whether or not the 
particular discharge was subject to the payment adjustment at Sec.  
412.534, that is, whether the discharge exceeded the 25 percent (or 
applicable percentage) threshold. If this is the case, and the 
calculation of the lesser of the amounts for a specific discharge 
resulted in Medicare paying an amount under the LTCH PPS that was 
equivalent to what would otherwise have been paid under the IPPS, and 
that payment included a HCO payment, this LTCH PPS payment would be 
governed by the regulations at Sec.  412.80(a)(3), based on the IPPS 
HCO policy. If the lesser of the two amounts is the otherwise payable 
amount under the LTCH PPS (which could be the case if the stay was a 
SSO, under Sec.  412.529) the original LTCH PPS Medicare payment which 
included the HCO payment under Sec.  412.525 will be finalized by the 
FI.
    In contrast, under the existing LTCH PPS SSO policy at Sec.  
412.529(c), HCO payments could be made for a SSO stay, regardless of 
whether the payment is ultimately based on: 120 percent of the LTC-DRG 
specific per diem amount multiplied by the LOS of the discharge; 120 
percent of the cost of the case; or the full LTC-DRG, if the total 
costs of the case exceed the least of these three options, plus the 
appropriate fixed-loss amount under Sec.  412.525. In the RY 2007 LTCH 
PPS proposed rule (71 FR 4648), we had proposed a fourth component to 
the SSO payment formula; however, in response to public comments, we 
have made substantial revisions to this fourth component of the SSO 
payment formula. Therefore, for the reasons described in section 
VI.A.1, we are lowering the 120 percent of costs to 100 percent, and we 
are also adding a revised fourth component to the current SSO payment 
formula, (that is, a blend of an amount comparable to what would 
otherwise be paid under the IPPS computed as a per diem, capped at the 
full IPPS DRG payment amount and 120 percent of the LTC-DRG per diem 
amount. For each day, as the LOS increases, the percentage of the IPPS 
comparable amount will decrease and the percentage based on 120 percent 
of the per diem LTC-DRG specific amount will increase. As the LOS 
reaches the lower of the five-sixths SSO threshold

[[Page 27881]]

or 25 days, the payment will no longer be limited by the fourth option. 
We are not, however, changing the existing SSO payment policy for HCOs, 
and therefore, if the costs of the case exceeded the payment resulting 
from this formula by the fixed loss amount under the LTCH PPS, Medicare 
payment to the LTCH for this case would include HCO payment set forth 
at Sec.  412.525.
    Consequently, we clarify the term ``equivalent'' at Sec.  
412.534(c)(2), (d)(1), and (e)(1) in our payment adjustment and codify 
the formula we use to give effect to these existing regulations.
    In Sec.  412.534, we established special payment provisions for 
long-term care HwHs and satellites of LTCHs (69 FR 49206). At 
subparagraph (d), we set forth a further payment adjustment for LTCHs 
that were co-located as HwHs or as satellites of LTCHs with rural 
hospitals and we cited the definition of rural at Sec.  412.62(f). This 
cite was incorrect since beginning in FY 2005, we adopted OMB's revised 
standards for defining MSAs (69 FR 49026) and therefore, the definition 
of rural that we intended to cite in Sec.  412.534(d) was Sec.  
412.64(b)(1)(ii)(C). We are therefore correcting Sec.  412.534(d) to 
cite the revised definition of rural at Sec.  412.64(b)(1)(ii)(C).
    We received the following comments on our discussion regarding the 
25 percent rule for HwHs in LTCHs that we discussed in the RY 2007 LTCH 
PPS proposed rule.
    Comment: Several commenters submitted views on our discussion in 
the RY 2007 LTCH PPS proposed rule regarding the 25 percent rule for 
HwHs in LTCHs. Some commenters suggested that instead of expanding the 
25 percent admission threshold, we should work with the LTCH industry 
to develop the types of clinically-based certification criteria 
recommended by MedPAC, which focus on patient characteristics and the 
level of patient care services that should be available at every LTCH. 
Other commenters stated that expansion of the 25 percent rule to free-
standing LTCHs is an arbitrary policy that puts patient care in 
jeopardy while making no progress towards MedPAC's goal of ensuring 
that patients are treated in the appropriate settings. Commenters 
stated their belief that compliance with the 25 percent rule would be 
almost impossible in communities where there may be only one or two 
short-term acute care hospitals, so expansion of the rule could 
effectively eliminate the ability of any LTCH (freestanding or HwH) to 
exist in these communities. As a result, residents in need of long-term 
care services would either need to travel outside the community or 
receive inappropriate care in their community. Several commenters 
stated that our allegation that LTCHs are operating as acute care 
hospital ``units'' was misdirected and that neither freestanding nor 
HwH LTCHs demonstrate the type of operational and financial integration 
with a referring hospital that are the hallmark of ``unit'' status 
(that is, each LTCH operates under its own provider agreement; files 
cost reports independently from others; and independently meets the 
hospital's conditions of participation).
    Response: We did not propose to make a change to expand the 25 
percent rule to freestanding LTCHs in the RY 2007 LTCH PPS proposed 
rule. However, we do appreciate the commenters' response to the 
concerns we raised in the proposed rule, and will take the comments 
into account as we further consider this issue for possible future 
rulemaking.
    We did not receive any comments regarding our clarification of 
``equivalent'' and ``comparable'' for IPPS payments. Therefore, we will 
be finalizing this proposed clarification.
    We received a significant number of comments that expressed 
specific concerns about several features of the LTCH PPS that were 
beyond the scope of this regulation and we will not be addressing them 
at this time.

VII. Computing the Adjusted Federal Prospective Payments for the 2007 
LTCH PPS Rate Year

    In accordance with Sec.  412.525 and as discussed in section V.C. 
of this final rule, the standard Federal rate is adjusted to account 
for differences in area wages by multiplying the labor-related share of 
the standard Federal rate by the appropriate LTCH PPS wage index (as 
shown in Tables 1 and 2 of the Addendum to this final rule). The 
standard Federal rate is also adjusted to account for the higher costs 
of hospitals in Alaska and Hawaii by multiplying the nonlabor-related 
share of the standard Federal rate by the appropriate cost-of-living 
factor (shown in Table 8 in section V.D.2. of this preamble). In the RY 
2006 LTCH PPS final rule (70 FR 24180), we established a standard 
Federal rate of $38,086.04 for the 2006 LTCH PPS rate year. In the RY 
2007 proposed rule (71 FR 4667 through 4670) we proposed that the 
standard Federal rate for the 2007 LTCH PPS rate year would remain 
$38,086.04. In this final rule, based on the best available data and 
the policies described in this final rule, the standard Federal rate 
for the 2007 LTCH PPS rate year will be $38,086.04 as discussed in 
section V.C. of this preamble. We illustrate the methodology used to 
adjust the Federal prospective payments for the 2007 LTCH PPS rate year 
in the following examples:

    Example: During the 2007 LTCH PPS rate year, a Medicare patient 
is in a LTCH located in Chicago, Illinois (CBSA 16974). This LTCH is 
in the fourth year of the wage index phase-in, thus, the four-fifths 
wage index values are applicable. The four-fifths wage index value 
for CBSA 16974 is 1.0632 (see Table 1 in the Addendum to this final 
rule). The Medicare patient is classified into LTC-DRG 9 (Spinal 
Disorders and Injuries), which has a relative weight of 0.9720 (see 
Table 3 of the Addendum to this final rule).
    To calculate the LTCH's total adjusted Federal prospective 
payment for this Medicare patient, we compute the wage-adjusted 
Federal prospective payment amount by multiplying the unadjusted 
standard Federal rate ($38,086.04) by the labor-related share 
(75.655 percent) and the wage index value (1.0632). This wage-
adjusted amount is then added to the nonlabor-related portion of the 
unadjusted standard Federal rate (24.335 percent; adjusted for cost 
of living, if applicable) to determine the adjusted Federal rate, 
which is then multiplied by the LTC-DRG relative weight (0.9720) to 
calculate the total adjusted Federal prospective payment for the 
2007 LTCH PPS rate year ($38,789.92). Finally, as discussed in 
section V.D.5. of this preamble, for the 2007 LTCH PPS rate year, we 
are establishing a budget neutrality offset of 1.0 to the total 
proposed adjusted Federal prospective payment to account for the 
costs of the transition methodology.

    The following illustrates the components of the calculations in the 
example in Table 14.

                                Table 14
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Unadjusted Standard Federal Prospective Payment Rate....      $38,086.04
Labor-Related Share.....................................       x 0.75665
Labor-Related Portion of the Federal Rate...............    = $28,817.80
\4/5\ Wage Index (CBSA 16974)...........................        x 1.0632
Wage-Adjusted Labor Share of Federal Rate...............    = $30,639.09
Nonlabor-Related Portion of the Federal Rate ($38,086.04    + $ 9,268.24
 x 0.24335).............................................
Adjusted Federal Rate Amount............................    = $39,907.33

[[Page 27882]]

 
LTC-DRG 9 Relative Weight...............................        x 0.9720
                                                         ---------------
    Total Adjusted Federal Prospective Payment (Before      = $38,789.92
     the Budget Neutrality Offset)......................
------------------------------------------------------------------------
Budget Neutrality Offset................................           x 1.0
                                                         ---------------
    Total Federal Prospective Payment (Including the        = $38,789.92
     Budget Neutrality Offset)..........................
------------------------------------------------------------------------

VIII. Transition Period

    To provide a stable fiscal base for LTCHs, under Sec.  412.533, we 
implemented a 5-year transition period whereby a LTCH (except those 
defined as ``new'' under Sec.  412.23(e)(4)) receives payment 
consisting of a portion based on reasonable cost-based reimbursement 
under the TEFRA system and a portion based on the Federal prospective 
payment rate (unless the LTCH elects payment based on 100 percent of 
the Federal rate). Under the average pricing system, payment is not 
based on the experience of an individual hospital. As discussed in the 
August 30, 2002 final rule (67 FR 56038), we believe that a 5-year 
phase-in provides LTCHs time to adjust their operations and capital 
financing to the LTCH PPS, which is based on prospectively determined 
Federal payment rates. Furthermore, we believe that the 5-year phase-in 
of the LTCH PPS also allows LTCH personnel to develop proficiency with 
the LTC-DRG coding system, which will result in improvement in the 
quality of the data used for generating our annual determination of 
relative weights and payment rates.
    Under Sec.  412.533, the 5-year transition period for all hospitals 
subject to the LTCH PPS begins with the hospital's first cost reporting 
period beginning on or after October 1, 2002 and extends through the 
hospital's last cost reporting period beginning before October 1, 2007. 
During the 5-year transition period, a LTCH's total payment under the 
LTCH PPS is based on two payment percentages: One based on reasonable 
cost-based (TEFRA) payments and the other based on the standard Federal 
prospective payment rate. The percentage of payment based on the LTCH 
PPS Federal rate increases by 20 percentage points each year, while the 
reasonable cost-based payment rate percentage decreases by 20 
percentage points each year, for the next 4 fiscal years. For cost 
reporting periods beginning on or after October 1, 2006, Medicare 
payment to LTCHs will be determined entirely under the Federal rate. 
The blend percentages as set forth in Sec.  412.533(a) are shown in 
Table 15.

                                Table 15
------------------------------------------------------------------------
                                                            Reasonable
                                                               cost
 Cost reporting periods beginning on or    Federal rate     principles
                  after                     percentage         rate
                                                            percentage
------------------------------------------------------------------------
October 1, 2002.........................              20              80
October 1, 2003.........................              40              60
October 1, 2004.........................              60              40
October 1, 2005.........................              80              20
October 1, 2006.........................             100               0
------------------------------------------------------------------------

    For cost reporting periods that begin on or after October 1, 2005, 
and before October 1, 2006 (FY 2006), the total payment for an existing 
LTCH that has not elected payment under 100 percent of the Federal 
prospective payment rate is 20 percent of the amount calculated under 
reasonable cost principles for that specific LTCH and 80 percent of the 
Federal prospective payment amount. For cost reporting periods that 
begin on or after October 1, 2006 (FY 2007), the total payment for a 
LTCH will be zero percent of the amount calculated under reasonable 
cost principles for that specific LTCH and 100 percent of the Federal 
prospective payment amount. As we noted in the June 6, 2003 final rule 
(68 FR 34155), the change in the effective date of the annual LTCH PPS 
rate update from October 1 to July 1 has no effect on the LTCH PPS 
transition period as set forth in Sec.  412.533(a). That is, LTCHs paid 
under the transition blend under Sec.  412.533(a) will receive those 
blend percentages for the entire 5-year transition period (unless they 
elect payments based on 100 percent of the Federal rate). Furthermore, 
LTCHs paid under the transition blend will receive the appropriate 
blend percentages of the Federal and reasonable cost-based rate for 
their entire cost reporting period as prescribed in Sec.  412.533(a)(1) 
through (a)(5).
    The reasonable cost-based rate percentage is a LTCH specific amount 
that is based on the amount that the LTCH would have been paid (under 
TEFRA) if the PPS were not implemented. Medicare FIs will continue to 
compute the LTCH reasonable cost-based payment amount according to 
Sec.  412.22(b) of the regulations and sections 1886(d) and (g) of the 
Act.
    In implementing the LTCH PPS, one of our goals is to transition 
hospitals to prospective payments based on 100 percent of the adjusted 
Federal prospective payment rate as soon as appropriate. Therefore, 
under Sec.  412.533(c), we allow a LTCH (other than new LTCHs defined 
at Sec.  412.23(e)(4)), which is subject to a blended rate, to elect 
payment based on 100 percent of the Federal rate at the start of any of 
its cost reporting periods during the 5-year transition period rather 
than incrementally shifting from reasonable cost-based payments to 
prospective payments based on 100 percent of the Federal rate. Once a 
LTCH elects to be paid based on 100 percent of the Federal rate, it 
will not be able to revert to the transition blend. For cost reporting 
periods that began on or after December 1, 2002 through September 30, 
2006, a LTCH must notify its FI in writing of its election on or before 
the 30th day prior to the start of the LTCH's next cost reporting 
period regardless of any postmarks or anticipated delivery dates. For 
example, a LTCH with a cost reporting period that

[[Page 27883]]

begins on May 1, 2006, must have notified its FI in writing of an 
election on or before April 1, 2006.
    Under Sec.  412.533(c)(2)(i), the notification by the LTCH to make 
the election must be made in writing to the Medicare FI. Under Sec.  
412.533(c)(2)(iii), the FI must receive the request on or before the 
specified date (that is, on or before the 30th day before the 
applicable cost reporting period begins for cost reporting periods 
beginning on or after December 1, 2002 through September 30, 2006), 
regardless of any postmarks or anticipated delivery dates.
    Requests received, postmarked, or delivered by other means after 
the specified date in Sec.  412.533(c)(2)(iii) will not be accepted. If 
the specified date falls on a day that the postal service or other 
delivery sources are not open for business, the LTCH will be 
responsible for allowing sufficient time for the delivery of the 
request before the deadline. If a LTCH's request is not received 
timely, payment will be based on the transition period blend 
percentages.

IX. Payments to New LTCHs

    Under Sec.  412.23(e)(4), for purposes of Medicare payment under 
the LTCH PPS, we define a new LTCH as a provider of inpatient hospital 
services that meets the qualifying criteria for LTCHs, set forth in 
Sec.  412.23(e)(1) and (e)(2), and under present or previous ownership 
(or both), has its first cost reporting period as a LTCH begin on or 
after October 1, 2002. We also specify in Sec.  412.500 that the LTCH 
PPS is applicable to LTCHs for cost reporting periods beginning on or 
after October 1, 2002. As we discussed in the August 30, 2002 final 
rule (67 FR 56040), this definition of new LTCHs should not be confused 
with those LTCHs first paid under the TEFRA payment system for 
discharges occurring on or after October 1, 1997, described in section 
1886(b)(7)(A) of the Act, as added by section 4416 of the Balanced 
Budget Act of 1997 (BBA) (Pub. L. 105-33). As stated in Sec.  
413.40(f)(2)(ii), for cost reporting periods beginning on or after 
October 1, 1997, the payment amount for a ``new'' (post-FY 1998) LTCH 
is the lower of the hospital's net inpatient operating cost per case or 
110 percent of the national median target amount payment limit for 
hospitals in the same class for cost reporting periods ending during FY 
1996, updated to the applicable cost reporting period (see 62 FR 46019, 
August 29, 1997). Under the LTCH PPS, those ``new'' LTCHs that meet the 
definition of ``new'' under Sec.  413.40(f)(2)(ii) and that have their 
first cost reporting period as a LTCH beginning prior to October 1, 
2002, will be paid under the transition methodology described in Sec.  
412.533.
    Under Sec.  412.533(d), new LTCHs will not participate in the 5-
year transition from reasonable cost-based reimbursement to prospective 
payment. As we discussed in the August 30, 2002 final rule (67 FR 
56040), the transition period is intended to provide existing LTCHs 
time to adjust to payment under the new system. Since these new LTCHs 
with their first cost reporting periods as LTCHs beginning on or after 
October 1, 2002, would not have received payment under reasonable cost-
based reimbursement for the delivery of LTCH services prior to the 
effective date of the LTCH PPS, we do not believe that those new LTCHs 
require a transition period in order to make adjustments to their 
operations and capital financing, as will LTCHs that have been paid 
under the reasonable cost-based methodology.

X. Method of Payment

    Under Sec.  412.513, a Medicare LTCH patient is classified into a 
LTC-DRG based on the principal diagnosis, up to eight additional 
(secondary) diagnoses, and up to six procedures performed during the 
stay, as well as age, sex, and discharge status of the patient. The 
LTC-DRG is used to determine the Federal prospective payment that the 
LTCH will receive for the Medicare-covered Part A services the LTCH 
furnished during the Medicare patient's stay. Under Sec.  412.541(a), 
the payment is based on the submission of the discharge bill. The 
discharge bill also provides data to allow for reclassifying the stay 
from payment at the full LTC-DRG rate to payment for a case as a SSO 
(under Sec.  412.529) or as an interrupted stay (under Sec.  412.531), 
or to determine if the case will qualify for a high-cost outlier 
payment (under Sec.  412.525(a)).
    Accordingly, the ICD-9-CM codes and other information used to 
determine if an adjustment to the full LTC-DRG payment is necessary 
(for example, LOS or interrupted stay status) are recorded by the LTCH 
on the Medicare patient's discharge bill and submitted to the Medicare 
FI for processing. The payment represents payment in full, under Sec.  
412.521(b), for inpatient operating and capital-related costs, but not 
for the costs of an approved medical education program, bad debts, 
blood clotting factors, anesthesia services by hospital-employed 
nonphysician anesthetists, or the costs of photocopying and mailing 
medical records requested by a Quality Improvement Organization (QIO), 
which are costs paid outside the LTCH PPS.
    As under the previous reasonable cost-based payment system, under 
Sec.  412.541(b), a LTCH may elect to be paid using the periodic 
interim payment (PIP) method described in Sec.  413.64(h) and may be 
eligible to receive accelerated payments as described in Sec.  
413.64(g).
    For those LTCHs that are paid during the 5-year transition based on 
the blended transition methodology in Sec.  412.533(a) for cost 
reporting periods that began on or after October 1, 2002, and before 
October 1, 2006, the PIP amount is based on the transition blend. For 
those LTCHs that are paid based on 100 percent of the standard Federal 
rate, the PIP amount is based on the estimated prospective payment for 
the year rather than on the estimated reasonable cost-based 
reimbursement. We exclude high-cost outlier payments that are paid upon 
submission of a discharge bill from the PIP amounts. In addition, Part 
A costs that are not paid for under the LTCH PPS, including Medicare 
costs of an approved medical education program, bad debts, blood 
clotting factors, anesthesia services by hospital-employed nonphysician 
anesthetists and the costs of photocopying and mailing medical records 
requested by a QIO, are subject to the interim payment provisions 
(Sec.  412.541(c)).
    Under Sec.  412.541(d), LTCHs with unusually long lengths of stay 
that are not receiving payment under the PIP method may bill on an 
interim basis (60 days after an admission and at intervals of at least 
60 days after the date of the first interim bill) and ``should include 
any high cost outlier payment determined as of the last day for which 
the services have been billed.''

XI. Monitoring

    In the August 30, 2002 final rule (67 FR 56014), we described an 
on-going monitoring component to the new LTCH PPS. Specifically, we 
discussed on-going analysis of the various policies that we believe 
would provide equitable payment for stays that reflect less than the 
full course of treatment and reduce the incentives for inappropriate 
admissions, transfers, or premature discharges of patients that are 
present in a discharge-based PPS. To this end, we have designed system 
features utilizing MedPAR data that will enable CMS and the FI to track 
beneficiary movement to and from a LTCH and to and from another 
Medicare provider. We also stated our intent to collect and interpret 
data on changes in average lengths of stay under the LTCH PPS for 
specific LTC-DRGs and the impact of these changes on the Medicare 
program. As a

[[Page 27884]]

result of our data analysis, we have revisited a number of our original 
and even pre-LTCH PPS policies in order to address what we believe are 
behaviors by certain LTCHs that lead to inappropriate Medicare 
payments. In recent Federal Register publications, we have proposed and 
subsequently finalized revisions to the interruption of stay policy (69 
FR 25692), and we established a payment adjustment for LTCH HwHs and 
satellites (69 FR 49191).
    On-going data analysis was also the basis for three of the issues 
that we had addressed in the proposed rule. As noted in section V., we 
are ``sunsetting'' the surgical DRG exception to the 3 day or less 
interruption of stay policy at Sec.  412.531(b)(2)(A)(1). We determined 
that eliminating this exception will not result in significant hardship 
for LTCHs. Our analyses of discharges between acute care hospitals and 
LTCHs revealed that a significant number of LTCHs that are not co-
located with other hospital-level providers (as defined in Sec.  
412.22(e) and Sec.  412.22(h)), also admit their patients from one 
specific acute care hospital. When we established the payment 
adjustment for LTCH HwHs and satellites of LTCHs at Sec.  412.534, we 
reiterated our concern that these on-site LTCHs could be functioning as 
units of their host (generally, an acute care hospital), a 
configuration that is not envisioned in section 1886(d)(1)(B) of the 
Act. The statute specifically allows only for IRF and IPF units in 
acute care hospitals but not for LTCH units. In section V. of the 
proposed rule, we had suggested that we would be looking into the 
possibility of extending the payment adjustment established under Sec.  
412.534 for LTCH HwHs and satellites of LTCHs to all LTCHs including 
freestanding LTCHs that we believe are LTCHs functioning as step-down 
units of a hospital. In making any such decision in the future, we will 
take into account comments that we received on this issue. In addition, 
as a result of our analysis and on-going monitoring protocols, we are 
establishing a zero percent update to the Federal payment rate for RY 
2007, which is explained in detail in section IV.
    As we discussed in the June 6, 2003 final rule (68 FR 34157), the 
Medicare Payment Advisory Commission (MedPAC) endorsed our monitoring 
activity as a primary aspect of the design and on-going functioning of 
the LTCH PPS. Furthermore, the Commission pursued an independent 
research initiative that led to a section in MedPAC's June 2004 Report 
to Congress entitled ``Defining long-term care hospitals''. This study 
included recommendations that we develop facility and patient criteria 
for LTCH admission and treatment and that we require a review by 
Quality Improvement Organizations (QIO) to evaluate whether LTCH 
admissions meet criteria for medical necessity once the recommended 
facility and patient criteria are established.
    Therefore, in addition to pursuing our on-going monitoring program 
under the direction of ORDI, existing QIO monitoring and studies 
described in the RY 2006 LTCH PPS final rule (70 FR 24211), and our 
considerations of expanding the QIO role in the LTCH PPS, we awarded a 
contract to Research Triangle Institute, International (RTI) in 
September 2004 for a thorough examination of the feasibility of 
implementing MedPAC's recommendations in the June 2004 Report to 
Congress (which we detail in section XII. of this final rule). In the 
RY 2005 LTCH PPS final rule, we noted that this research contract, 
which was funded for FY 2005 was presently being executed and 
therefore, we presented specifics of the RTI project in the RY 2007 
LTCH PPS proposed rule. In this final rule, as noted previously, we 
have included a section that describes RTI's analyses.
    Comment: One commenter asked why CMS continues to issue changes to 
the LTCH PPS rather than letting market forces determine its direction. 
Another commenter also invoked the marketplace in asserting that the 
large increase in the number of LTCHs is market-driven, that is, if the 
operators were not sensing a need and patients were not coming, the 
number of LTCHs would not be growing. The commenter suggested that CMS 
should not be concerned about the rapid growth in this provider type 
and allow the market to regulate growth.
    Response: We disagree with the commenters' suggestions that CMS 
should not continue to issue changes to the LTCH PPS, but rather let 
market forces determine its direction. In establishing the Medicare 
system, the Congress imposed the responsibility to provide health 
insurance for Medicare beneficiaries. The mandate for implementing the 
Medicare program tasks CMS with fiduciary responsibilities that require 
us to develop an effective and efficient payment system to finance the 
delivery of medical services to beneficiaries who have financed 
Medicare as taxpayers and who depend upon the program as their primary 
health insurance when they retire. In order to meet these 
responsibilities, CMS established a regulatory framework governing the 
payment for those health care services covered by Medicare for program 
beneficiaries in a manner that protects both the trust fund and the 
program recipient against those forces in the market place that may be 
driven primarily by a desire to maximize Medicare payments. Therefore, 
our objective in issuing LTCH regulations for all aspects of the health 
care delivery system as it impacts Medicare beneficiaries, is to be a 
prudent purchaser of medical services. Our awareness of market forces, 
our monitoring programs and data analyses, and information garnered 
from our regional offices and FIs indicate to us that the remarkable 
growth in the number of LTCHs during the last several years may be for 
the most part, driven by the opportunity to earn large profits on the 
treatment of Medicare patients. Therefore, we proposed and ultimately 
are finalizing regulations that we believe further our mandated role as 
a prudent purchaser of medical services and also as guardian of the 
Medicare Trust Fund. Accordingly, we believe that in an industry where 
Medicare is by far the primary payer for services provided, we cannot 
rely solely on market forces to determine how much the program should 
pay for beneficiary care.

XII. MedPAC Recommendations

A. Discussion of MedPAC's March 2006 Report to Congress: Medicare 
Payment Policy

    On March 1, 2006, MedPAC released its Report to Congress: Medicare 
Payment Policy fulfilling its legislative mandate to evaluate Medicare 
policy issues and make specific recommendations to Congress. In the 
March 2006 Report, MedPAC included a discussion of LTCH payments and 
the resultant recommendation by the Commission in Chapter 4C, Long-term 
care hospital services. MedPAC found that Medicare payments for LTCH 
services are more than adequate, basing this conclusion on various 
measures including, but not limited to, access to care, volume 
services, and supply of facilities. MedPAC recommended to the Congress 
that the update to payment rates for LTCH services should be eliminated 
for FY 2007.
    As discussed in the final rule, because we believe that current 
payments are more than adequate to account for price increases in the 
services furnished by LTCHs during the 2007 LTCH PPS rate year, under 
the broad authority conferred upon the Secretary by section 123 of the 
Balanced Budget Refinement Act (BBRA) as amended by section 307(a) of 
the Budget Improvement and

[[Page 27885]]

Protection Act (BIPA) to include appropriate adjustments in the 
establishment of the LTCH PPS, we are revising our regulations to 
specify that for discharges occurring on or after July 1, 2006 and on 
or before July 31, 2007, the standard Federal rate from the previous 
year would be updated by a factor of zero percent. We note that our 
decision to apply a zero update is consistent with the recommendation 
the Commission made to the Congress. Further discussion of this issue 
can be found in section XX of the final rule.

B. RTI Report on MedPAC's June 2004 Recommendations

    In the RY 2006 LTCH PPS final rule (70 FR 24209), we discussed 
Chapter 5 of MedPAC's June 2004 Report to Congress (RTC), ``Defining 
Long-Term Care Hospitals''. In that Report, the Commission recommended 
that the Congress and the Secretary define LTCHs by facility and 
patient criteria to ensure that patients admitted to LTCH facilities 
are medically complex and have a good chance of improvement. In 
addition, the Commission recommended expanding the statement of work 
for the Quality Improvement Organizations (QIOs) to enable them to 
monitor LTCH compliance with any newly-established hospital and patient 
criteria.
    As detailed in that same final rule, in response to the 
recommendation in MedPAC's June 2004 Report, on September 27, 2004, we 
awarded a contract to Research Triangle Institute, International (RTI) 
for a thorough examination of the feasibility of implementing the 
Commission's recommendations based on the performance of a wide variety 
of analytic tasks using CMS data files, and information RTI would 
collect from physicians, providers, and LTCH trade associations. This 
contract, ``Long Term Care Hospital Payment System Refinement/
Evaluation,'' will result in a report that will assist CMS in the 
evaluating the development of criteria for assuring appropriate and 
cost-effective use of LTCHs in the Medicare program. With the 
recommendations of MedPAC's June 2004 Report to Congress as a point of 
departure, RTI evaluated the feasibility of developing patient and 
facility level characteristics for LTCHs in order to identify and 
distinguish the role of these hospitals as a Medicare provider.
    RTI's project plan was completed in two phases. Phase I focused on 
an analysis of LTCHs within the current Medicare system: Their history 
as participating providers; their case mix; the criteria currently used 
by QIOs to determine the appropriateness of treatment in LTCHs; and the 
site of care for patients treated in areas that lack LTCHs. RTI 
reviewed prior analyses of these issues by MedPAC and other contractors 
(such as the Urban Institute, 3M Health Information Systems, and The 
Lewin Group) and conducted additional discussions with MedPAC, other 
researchers, and the QIOs. Building on the work of Phase I, Phase II 
addressed the feasibility of MedPAC's proposed criteria based on a 
three-pronged approach: Medicare claims analysis to examine patient 
differences across settings; interviews with QIOs and providers to 
examine level of care definitions currently being used or tested; and 
finally site visits to interview providers with the objective of 
distinguishing LTCHs from other inpatient settings for payment 
purposes. During October through December 2005, RTI scheduled and 
conducted site visits to LTCHs throughout the country that are 
representative of the various types of LTCHs. A team of RTI researchers 
and CMS analysts, including a physician, participated in these visits.
    We anticipate that RTI will submit their final report to us in late 
Spring of 2006. We note that while this report may have a substantial 
impact on future Medicare policy for LTCHs, we still believe that even 
with the development of defined patient and perhaps facility-level 
criteria, that the retention of many of the specific payment adjustment 
features of the LTCH PPS presently in place may still be both necessary 
and appropriate for purposes of protecting the integrity of the 
Medicare trust fund.

XIII. Health Care Information Transparency Initiative

    In the FY 2007 Hospital Inpatient Prospective Payment System 
proposed rule (71 FR 23996), we discussed in detail the Health Care 
Information Transparency Initiative and our efforts to promote 
effective use of health information technology (HIT) as a means to help 
improve health care quality and improve efficiency. Specifically, for 
the transparency initiative, we discussed several potential options for 
making pricing and quality information available to the public (71 FR 
24120 through 24121). We solicited comments on the ways HHS can 
encourage transparency in health care quality and pricing whether 
through its leadership on voluntary initiatives or through regulatory 
requirements. We also are seeking comment on the HHS's statutory 
authority to impose such requirements.
    In addition, we discussed the potential for HIT to facilitate 
improvements in the quality and efficiency of health care services (71 
FR 24100 through 24101). We solicited comments on our statutory 
authority to encourage the adoption and use of HIT. The 2007 Budget 
states that ``the Administration supports the adoption of health 
information technology (IT) as a normal cost of doing business to 
ensure patients receive high quality care.'' We also are seeking 
comments on the appropriate role of HIT in a potential value-based 
purchasing program, beyond the intrinsic incentives of a prospective 
payment system to provide efficient care, encourage the avoidance of 
unnecessary costs, and increase quality of care. In addition, we are 
seeking comments on the promotion of the use of effective HIT through 
Medicare conditions of participation.
    We intend to consider both the health care information transparency 
initiative and the use of HIT as we refine and update all Medicare 
payment systems. Therefore, while these initiatives are not included in 
this final rule, we are in the process of seeking input on these 
initiatives in various proposed Medicare payment rules being issued 
this year and may pursue these policies in future rulemaking for the 
LTCH PPS.

XIV. Collection of Information Requirements

    In the RY 2007 LTCH PPS proposed rule (71 FR 4648), we outlined the 
collection of information requirements associated with the provisions 
presented in that rule.
    In summary, section 412.525(a)(4)(iv)(A) proposed that CMS may 
specify an alternative to the cost-to-charge ratio otherwise applicable 
under paragraph (a)(4)(iv)(B) of this section. In addition, a hospital 
may also request that its FI use a different (higher or lower) CCR 
based on substantial evidence provided by the hospital. The burden 
associated with this requirement is the time and effort necessary for a 
hospital to gather, process, and submit the necessary documentation to 
its FI to substantiate its request for the use of a different CCR by 
their FI. For example, necessary documentation, as stipulated by CMS 
and the FI, may include but not be limited to financial records 
documenting the hospital's cost and charges.
    Section 412.529(c)(4)(iv)(A) proposed that CMS may specify an 
alternative to the CCR otherwise applicable under paragraph 
(c)(4)(iv)(B) of this section. In addition, a hospital may also request 
that its FI use a different (higher or lower) CCR based on substantial 
evidence provided by the hospital. The burden associated with this 
requirement

[[Page 27886]]

is the time and effort necessary for a hospital to gather, process, and 
submit the necessary documentation to its FI to substantiate its 
request for the use of a different CCR by their FI. For example, 
necessary documentation, as stipulated by CMS and the FI, may include 
but not be limited to financial records documenting the hospital's cost 
and charges.
    The aforementioned information collection requirements were 
proposed again in the FY 2007 IPPS proposed rule, and to the extent 
they are implemented, will be presented in the FY 2007 IPPS final rule 
published this summer in the Federal Register. Prior to the publication 
of the IPPS final rule, we will submit a formal information collection 
request to the Office of Management and Budget (OMB) for its review and 
approval of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
OMB.

XV. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132.
1. Executive Order 12866
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any one 
year). We are using the rates, factors and policies presented in this 
final rule, including updated wage index values, and the best available 
claims data to estimate payments for the 2007 LTCH PPS rate year. Based 
on the best available data for 347 LTCHs, we estimate that the change 
to the SSO policy (as discussed in section VI.A.1. of the preamble of 
this final rule) for the 2007 LTCH PPS rate year, in conjunction with 
the changes to the area wage adjustment (discussed in section V.D.1. of 
the preamble of this final rule), and the increase in the outlier 
fixed-loss amount (discussed in section V.D.3.c. of the preamble of 
this final rule), will result in a decrease in estimated payments from 
the 2006 LTCH PPS rate year of approximately $156 million for the 347 
LTCHs. (An estimate of Medicare program payments for LTCH services for 
the next 5 years is shown in section XV.B.5. of the preamble of this 
final rule.) Because the combined distributional effects and costs to 
the Medicare program are greater than $100 million, this final rule is 
considered a major economic rule, as defined in this section.
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. For purposes of the RFA, all 
hospitals (and most other providers and suppliers) are considered small 
entities according to the Small Business Administration's latest size 
standards (for further information, see the Small Business 
Administration's regulation at 65 FR 69432, November 17, 2000). Because 
we lack data on individual hospital receipts, we cannot determine the 
number of small proprietary LTCHs. Therefore, we assume that all LTCHs 
are considered small entities for the purpose of the analysis that 
follows. Medicare FIs are not considered to be small entities. 
Individuals and States are not included in the definition of a small 
entity.
    Currently, our database of 347 LTCHs includes the data for 69 non-
profit (voluntary ownership control) LTCHs and 232 proprietary LTCHs. 
Of the remaining 46 LTCHs, 10 LTCHs are Government-owned and operated 
and the ownership type of the other 36 LTCHs are unknown (see Table 
16). The impact of the changes for the 2007 LTCH PPS rate year is 
discussed below in section XV.B.4.c. of the preamble of this final 
rule. The provisions of this final rule are estimated to result in 
approximately a 3.7 percent decrease in estimated payments per 
discharge in the 2007 LTCH PPS rate year on average to LTCHs (as shown 
in Table 16). As discussed in greater detail below in this section (and 
as shown in Table 16), the majority of the approximately 3.7 percent 
decrease in estimated payments in the 2007 LTCH PPS rate year as 
compared to the 2006 LTCH PPS rate year is due to the change in the 
payment formula for SSO cases (discussed in section VI.A.1.a. of the 
preamble of this final rule). We do not believe that this change will 
result in an adverse impact on affected LTCHs for the reasons discussed 
below in this section. We believe that the revisions to the SSO policy 
established in this final rule will accomplish our stated goal of 
removing the incentive for LTCHs to admit patients for whom a long-term 
hospital stay is not necessary and therefore, for whom the LTCH would 
not be providing complete treatment. Furthermore, we believe the 
revisions to the SSO policy will result in appropriate payments for 
those relatively shorter LOS cases.
    As we discuss in greater detail in section VI.A.1.a. of the 
preamble of this final rule, currently about 37 percent of all LTCH 
cases are SSOs, most of which were admitted to the LTCH directly from 
an acute-care hospital. Of these almost 48,000 LTCH SSO cases from FY 
2005, about 60 percent have a LOS of less than or equal to 14 days, of 
which almost 24 percent have a LOS of less than or equal to 7 days. 
Thus, many short-stay cases may be still in need of acute-level care at 
the time of admission to the LTCH, which may indicate a premature and 
inappropriate discharge from the acute-care hospital and an 
inappropriate admission to a LCTH. Moreover, many of these very short-
stay cases most likely do not receive a full course of a LTCH-level of 
treatment in such a short period of time since LTCHs generally are 
intended to treat patients with an ALOS of greater than 25 days, and 
therefore, we believe that the changes to the SSO policy will result in 
more appropriate payments for short-stay cases treated at LTCHs. We 
believe that by paying appropriately for these SSO cases and removing 
the financial incentive for LTCHs to admit those very short stay cases 
that could otherwise receive appropriate treatment at an acute-care 
hospital (and be paid under the IPPS), LTCHs will change their 
admission patterns for these patients. Specifically, we believe that in 
response to the implementation of the revision to the SSO payment 
formula, most LTCHs will significantly reduce the number of very short-
stay cases that they admit (and most of those patients will continue to 
receive treatment at the acute-care hospital from which they are 
typically discharged immediately prior to their LTCH (short-stay) 
admission).
    The estimated 3.7 percent decrease in LTCH PPS payments for RY 2007 
was determined based on the current LTCH

[[Page 27887]]

admission pattern of SSO cases (that is, currently about 37 percent of 
all LTCH cases, of which about 60 percent have a LOS of less than or 
equal to 14 days). Thus, we believe that the estimated 3.7 percent 
decrease in LTCH payments per discharge for RY 2007 will only occur if 
LTCHs were to continue to admit the same number and type of SSO 
patients. Since the majority of the decrease in estimated payments is 
due to the change in the SSO policy and since we anticipate that LTCHs 
will no longer admit such a large number of VSSO patients when these 
changes are implemented, we believe that the actual decrease in LTCHs' 
payments for RY 2007 will be less than estimated 3.7 percent. (Although 
we expect LTCHs to admit fewer cases under this change, we believe that 
most LTCHs, which are HwHs, will not experience an increase in cost per 
discharge as a result of unoccupied beds. Rather, we expect that LTCHs 
will make a commensurate reduction in available beds. LTCHs will lease 
fewer beds, and therefore, the LTCHs' cost per discharge will not 
increase dramatically.)
    Furthermore, our Medicare margins analysis of the most recent LTCH 
cost report data, show that LTCH PPS Medicare margins for FY 2003 were 
7.8 percent, and preliminary cost report data for FY 2004 reveal an 
even higher Medicare margin of 12.7 percent (as discussed in greater 
detail in section IV.C.3. of the preamble to this final rule). Since 
LTCH PPS payments appear to be more than adequate to cover the costs of 
the efficient delivery of care to patients at LTCHs, based on this 
margins analysis, we believe that even with an estimated 3.7 percent 
decrease in LTCHs' payments per discharge for the 2007 LTCH PPS rate 
year, which may result from, among other things, the continued 
treatment of some short-stay cases and the estimated slight decrease in 
aggregate payments due to the changes to the area wage adjustment (see 
Table 16), LTCH PPS payments in RY 2007 will still be sufficient to 
compensate LTCHs for the costs of the efficient delivery of LTCH 
services to LTCH patients. (As noted above, LTCH PPS Medicare margins 
(7.8 percent for FY 2003 and 12.7 percent for FY 2004) appear to be at 
least twice the estimated percent decrease in Medicare payments for RY 
2007 (3.7 percent).) Thus, we do not expect that the provisions of this 
final rule will result in an adverse financial impact on affected LTCHs 
nor will there be an effect on beneficiaries' access to care.
    For the reasons discussed above, we do not expect an estimated 
decrease of 3.7 percent to the LTCH PPS Medicare payment rates to have 
a significant adverse effect on the ability of most LTCHs to provide 
cost efficient services to Medicare patients. In addition, LTCHs 
provide some services to (and generate revenue from) patients other 
than Medicare beneficiaries, and therefore, the revenue to LTCHs from 
treating those patients is not affected by this final rule. 
Accordingly, we certify that this final rule will not have a 
significant impact on a substantial number of small entities, in 
accordance with the RFA.
3. Impact on Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. As shown in Table 16, we 
are estimating a 5.8 percent decrease in payment per discharge for the 
2007 LTCH PPS rate year as compared to the 2006 LTCH PPS rate year 
based on the data of the 22 rural hospitals in our database of 347 
LTCHs for which complete data were available.
    As shown below in Table 16, the majority of the estimated decrease 
in payments in the 2007 LTCH PPS rate year as compared to the 2006 LTCH 
PPS rate year for rural LTCHs is due to the change in the area wage 
adjustment (as discussed in greater detail in section V.D.1. of the 
preamble of this final rule). Specifically, because all rural LTCHs are 
located in areas with a wage index value that is less than 1.0, the 
increase in the labor-related share for RY 2007 that we are 
establishing in this final rule (discussed in section IV.d.1.c. of the 
preamble) is expected to result in an estimated decrease in payments to 
rural LTCHs. We also note that, although we are not making any changes 
to the 5-year phase-in of the wage index adjustment that was 
established when the LTCH PPS was implemented (August 30, 2002; 67 FR 
56018), the continued progression of this phase-in also contributes to 
the estimated decrease in payments to rural LTCHs for RY 2007. 
Specifically, since under the established phase-in of the wage-index 
adjustment, LTCHs receive an increasing amount of the applicable full 
wage index value (which is less than 1.0 for all rural LTCHs), we 
expect that rural LTCHs payments per discharge will decrease from RY 
2006 to RY 2007 as a result of the progression of the 5-year phase-in 
of the wage index adjustment. Thus, a portion of the estimated 2.9 
percent decrease in payments per discharge for rural LTCHs due to 
changes in the wage index adjustment (see Table 16) is due to the 
established 5-year phase-in of the wage index adjustment and is not due 
to policy changes established in this final rule.
    Furthermore, we continue to believe that payments to rural LTCHs in 
RY 2007 will be adequate to cover the cost of the efficient delivery of 
LTCH services to Medicare Patients. Based on our recent margins 
analysis (discussed in section IV.C.3. of this final rule), LTCH 
margins for FY 2003 are in excess of 7 percent, and preliminary FY 2004 
data show margins in excess of 12 percent. Moreover, margins for rural 
LTCHs for FY 2003 are in excess of 9 percent, and preliminary FY 2004 
data shows margins in excess of 11 percent for rural LTCHs. Therefore, 
based on the positive margins for rural LTCHs, we believe that even 
with an estimated decrease in LTCHs' payments per discharge for the 
2007 LTCH PPS rate year, LTCH PPS payments to rural LTCHs will be 
sufficient to compensate LTCHs for the costs of the efficient delivery 
of LTCH services to LTCH patients.
    The payment formula for SSO cases (discussed in section VI.A.1.a of 
the preamble of this final rule) also contributes to the estimated 
decrease in payments to rural LTCHs for RY 2007. However, we do not 
believe that this change will result in an adverse impact on rural 
LTCHs because, as a result of this change, we believe that LTCHs 
(including rural LTCHs) will significantly reduce the number of short-
stay cases that they admit since this policy is expected to remove the 
financial incentive for LTCHs to treat very short-stay cases by paying 
appropriately for them. Furthermore, although most LTCHs (including 
rural LTCHs) are expected to admit fewer short-stay cases upon 
implementation of the changes to the SSO policy, most of those patients 
would continue to receive treatment at the acute-care hospital from 
which they are typically discharged from immediately prior to their 
LTCH (short-stay) admission, and most LTCHs (which are HwHs) would not 
experience an increase in cost per discharge as a result of unoccupied 
beds.
    The estimated 5.8 percent decrease in LTCH PPS payments for RY 2007 
for rural LTCHs was determined based on the current LTCH admission 
pattern of SSO cases (that is, currently about 37 percent of all LTCH 
cases) of which about 60 percent have a LOS of less than

[[Page 27888]]

or equal to 14 days. Thus, we believe that the estimated 5.8 percent 
decrease in LTCH payments per discharge for RY 2007 for rural LTCHs 
will only occur if rural LTCHs continue to admit the same number and 
type of SSO patients. Since half of the approximately 5.8 percent 
decrease in estimated payments for rural LTCHs is due to the change in 
the SSO policy and since we anticipate that LTCHs (including rural 
LTCHs) will no longer admit such a large number of SSO patients for 
whom payments will be affected by this change to the SSO payment 
formula (in particular, those with a very short LOS) when these changes 
are implemented, we believe that the actual decrease in rural LTCHs' 
payments for RY 2007 will be considerably less than 5.8 percent. 
Therefore, we believe that the estimated 5.8 percent decrease in 
payments per discharge for the 2007 LTCH PPS rate year for rural LTCHs 
will only occur if LTCHs maintain the same level and type of SSO 
patients.
    Since, for the reasons discussed in this section, we believe that 
any decrease in rural LTCH's payments per discharge from RY 2006 to RY 
2007 will be less than the estimated decrease of 5.8 percent shown in 
Table 16, we are unable to determine whether the changes established in 
this final rule would have a significant adverse effect on rural LTCHs. 
However, as explained above, do not expect that the provisions of this 
final rule will affect the ability of the vast majority of rural LTCHs 
to provide cost efficient services to Medicare patients nor do we 
expect there will be an effect on beneficiaries' access to care. (For 
additional information on the impact of the changes on rural LTCHs 
presented in this final rule, refer to the discussion of the impact 
analysis in section XV.B.4 of this final rule.)
4. Unfunded Mandates
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. That 
threshold level is currently approximately $120 million. This final 
rule will not mandate any requirements for State, local, or tribal 
governments, nor will it result in expenditures by the private sector 
of $120 million or more in any one year.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this final rule under the criteria set forth in 
Executive Order 13132 and have determined that this final rule will not 
have any significant impact on the rights, roles, and responsibilities 
of State, local, or tribal governments or preempt State law, based on 
the 10 State and local LTCHs in our database of 347 LTCHs for which 
data are available.
6. Summary of Comments and Responses on the RY 2007 Proposed Rule 
Regulatory Impact Analysis
    In section XIII of the RY 2007 LTCH PPS proposed rule (71 FR 4727 
through 4747), in accordance with Executive Order 12866 (September 
1993, Regulatory Planning and Review), the RFA (September 19, 1980, 
Pub. L. 96-354), section 1102(b) of the Act, the UMRA (Pub. L. 104-4), 
and Executive Order 13132, we examined the impact of the provisions 
presented in that proposed rule. Specifically, we discussed the impact 
of the proposed changes to the payment rates, factors, and policies 
presented in that proposed rule in terms of their fiscal impact on the 
Medicare budget and on LTCHs under the provisions referenced above.
    Comment: Some commenters suggested that CMS should reconsider the 
regulatory impact of the proposed rule and issue a revised RIA, as well 
as allow for comment on the revised RIA. Specifically, the commenters 
state that ``the proposed 11.1 percent decrease in LTCH PPS payments is 
based upon unreliable data and analyses by CMS and, as a result, the 
projections set forth in the RIA are conjecture at best.'' Therefore, 
the commenters believe that the LTCH industry is unable to ``* * * 
evaluate, meaningfully comment, and rely * * *'' on CMS' conclusions 
set forth in the RIA. The commenters believe the RIA does not provide 
discussion on how ``the statutorily-mandated budget neutrality of the 
LTCH PPS * * *'' will be maintained and disagrees with CMS' statement 
that it does not anticipate any changes in Medicare beneficiary access 
to services or in quality of patient care while there is currently a 
11.1 percent reduction in LTCH payments due to reductions in SSO 
payments, a 4.2 percent decrease due to the LTC DRGs being reweighted, 
as well as a proposed zero market basket update, and revisions to the 
guidelines for using DRG 475. Another commenter stated that CMS failed 
to do any analysis to demonstrate that the proposed estimated 11.1 
percent payment decrease and proposed zero percent update maintains a 
budget neutral LTCH PPS, as required by statute.
    Response: CMS strongly disagrees with the commenters' assertion 
that ``projections set forth in the RIA are conjecture at best.'' 
Projections in the RIA of the RY 2007 LTCH PPS proposed rule modeled 
proposed policy changes that included proposed changes to SSO payments, 
expected case-mix index changes, the proposed changes to the area wage 
adjustment, and the proposed changes to HCO payments. The results of 
the payment models shown in the RIA used LTCH Medicare cost report data 
from the most recent update of the HCRIS files and Medicare claims data 
from the most recent update of the MedPAR files. We also relied upon 
provider information from the Online Survey Certification and Reporting 
(OSCAR) database and from the provider specific file (PSF), which is a 
file that is maintained by the FIs and is used in paying Medicare 
provider claims. These are the best and most reliable data sources 
available to CMS for modeling the impacts of policy changes. We note 
that these same databases are used in modeling payment impacts under 
the IPPS, the outpatient PPS, the IRF PPS and the IPF PPS, as well as 
other Medicare payment systems.
    As we stated in the RY 2007 LTCH PPS proposed rule, to estimate the 
impacts among the various categories of providers during the LTCH PPS 
transition period, it is necessary that reasonable cost-based 
methodology payments and prospective payments contain similar inputs. 
More specifically, in the impact analysis showing the impact reflecting 
the applicable transition blend percentages of prospective payments and 
reasonable cost-based methodology payments and the option to elect 
payment based on 100 percent of the proposed Federal rate, we estimated 
payments only for those providers for whom we are able to calculate 
payments based on reasonable cost-based methodology. For example, if we 
did not have at least 2 years of historical cost data for a LTCH, we 
were unable to determine an update to the LTCH's target amount to 
estimate payment under reasonable cost-based methodology. Thus, for 
that impact analysis (shown in Table 23 of the RY 2007 LTCH PPS 
proposed rule (71 FR 4732 through 4733)), we used data from 259 LTCHs. 
Since cost data to determine payments under the reasonable cost-based 
methodology were not needed to simulate payments based on 100 percent

[[Page 27889]]

of the proposed Federal rate, we were able to project the impact 
analyses reflecting fully phased-in prospective payments using data 
from 337 LTCHs (as shown in Table 24 of the RY 2007 LTCH PPS proposed 
rule (71 FR 4734 through 4735)).
    The RIA in the RY 2007 LTCH PPS proposed rule, showing both the 
impact on providers in the transition period and the impact of the 
fully phased-in LTCH PPS, which was made available to the public, 
provided commenters with an opportunity to provide CMS with comments. 
In response to the commenters' belief that the RIA is based on unsound 
data, we remind the commenters that, as in every year since the 
inception of the LTCH PPS, the public has had occasion to access the 
data files used by CMS in determining changes to the LTCH PPS payment 
policy through communication with our Office of Information Services 
(OIS). (Information about obtaining MedPAR files and other Medicare 
data files is posted on the CMS Web page at: http://www.cms.hhs.gov/FilesForOrderGenInfo/.) Additionally, the impact data used in the 
development of the RIA were posted on the CMS Web site for public 
review. We note that reports based on evaluation of these data sources 
by two different entities were quoted liberally in many of the comments 
that we received on the RY 2007 proposed rule. Therefore, we do not 
agree with the assertion by this commenter that commenters in general 
were unable to meaningfully evaluate the data.
    We believe that commenters when referring to the budget neutrality 
requirement mean a system-wide budget neutrality requirement. A system-
wide budget neutrality requirement means, specifically, payments under 
the LTCH PPS are always estimated to equal estimated system-wide (that 
is, aggregate) payments that would have been made under the reasonable 
cost-based (TEFRA) payment methodology if the LTCH PPS were not 
implemented. We disagree with the commenters that the RIA presented in 
the RY 2007 LTCH PPS proposed rule should have discussed ``the 
statutorily-mandated budget neutrality of the LTCH PPS'' or that 
proposed estimated 11.1 percent payment decrease and proposed zero 
percent update violates the statutory requirement that the LTCH PPS be 
budget neutral. We note that under section 123(a) of the BBRA, the 
Congress required that the Secretary develop ``* * * a per discharge 
prospective payment system for payment for inpatient hospital services 
of long-term care hospitals described in section 1886(d)(1)(B)(iv) of 
Act (42 U.S.C. 1395ww(d)(1)(B)(iv)) under the Medicare program. Such 
system shall include an adequate patient classification system that is 
based on diagnosis-related groups (DRGs) and that reflects the 
differences in patient resource use and costs, and shall maintain 
budget neutrality.'' We have interpreted the requirement to ``maintain 
budget neutrality'' to require that the Secretary set total estimated 
prospective payments for FY 2003 equal to estimated payments that would 
have been made under the TEFRA methodology if the prospective payment 
system for LTCHs was not implemented. It has been our consistent 
interpretation that the statutory requirement for budget neutrality 
applies exclusively to FY 2003. In FY 2003, we set total estimated LTCH 
PPS payments for FY 2003 equal to estimated payments that would have 
been made under the TEFRA methodology if the prospective payment system 
for LTCHs was not implemented. Consequently, we believe that we have 
satisfied the budget neutrality requirement under the statute. 
Moreover, we have broad discretionary authority under section 123(a)(1) 
of the BBRA as amended by section 307(b)(1) of the BIPA to provide 
appropriate adjustments, including updates. Thus, we are acting within 
that broad authority in establishing policy changes in this final rule, 
including a zero percent update to the Federal rate for RY 2007 
(discussed in section V.C.3. of the preamble of this final rule)and 
changes to the SSO payment formula (discussed in section IV.A.1.a. of 
the preamble of this final rule).
    There are several reasons that we do not believe that the Congress 
intended perpetual system-wide budget neutrality. We note below a 
partial list of these reasons. For example, a system-wide budget 
neutrality requirement that applies perpetually would affect the 
Secretary's ability to operate the prospective payment system for LTCHs 
efficiently. To illustrate, if the Secretary were to propose to adjust 
payments upward in a particular instance because he finds that payments 
are ``too low,'' under a perpetual budget neutral system the Secretary 
would be forced to reduce estimated payments for other cases in order 
to fund the additional costs associated with the proposed adjustment. 
However, this shifting of resources may then cause payments to LTCHs 
for those cases that were being reduced to offset the proposed 
adjustment to then be inappropriately ``too low.'' We do not believe 
the Congress intended such a result for every adjustment that will be 
made to the LTCH PPS in perpetuity. Rather, as with all dynamic and 
evolving systems, we believe that based upon monitoring and the 
analysis of data, the Secretary has the discretion and obligation to 
formulate polices and establish payment adjustments that will pay LTCHs 
appropriately for beneficiary care.
    Also, we note that none of the statutory charges for the other 
prospective payment systems (that is, IPPS, SNF PPS, IRF PPS) require 
system-wide budget neutrality for perpetuity. We are not aware of 
anything unique about LTCHs or the need to establish a LTCH PPS that 
would have compelled the Congress to legislate a system that mandates 
budget neutrality in perpetuity. Consequently, we do not believe that 
in the instant case, the Congress departed from its consistent approach 
with respect to budget neutrality and intended to create a statute 
which applies a completely different standard to the LTCH PPS.
    As we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4728) 
and as we reiterated in this RIA, although most LTCHs are expected to 
admit fewer short-stay cases upon implementation of the changes to the 
SSO policy, the majority of those patients would continue to receive 
treatment at the acute-care hospital from which they are typically 
discharged from immediately prior to their LTCH (short-stay) admission, 
and most LTCHs (which are HwHs) would not experience an increase in 
cost per discharge as a result of unoccupied beds. Furthermore, as we 
discuss in section IV.C.3. of the preamble of this final rule, our 
Medicare margins analysis of the most recent LTCH cost report data 
shows a 7.8 percent Medicare margin for FY 2003, and preliminary cost 
report data for FY 2004 reveal an even higher Medicare margin of 12.7 
percent. Since LTCH PPS payments appear to be more than adequate to 
cover the costs of the efficient delivery of care to patients at LTCHs, 
based on this margins analysis, we believe that even with an estimated 
3.7 percent decrease in LTCHs' payments per discharge for the 2007 LTCH 
PPS rate year, those payments will still be sufficient to compensate 
LTCHs for the costs of the efficient delivery of LTCH services to LTCH 
patients. (As noted above, LTCH PPS Medicare margins (7.8 percent for 
FY 2003 and 12.7 percent for FY 2004) appear to be at least twice the 
estimated percent decrease in Medicare payments for RY 2007 (3.7 
percent).) Therefore, we do not believe that the estimated decrease in 
LTCH PPS payments for RY 2007 will result in an adverse financial

[[Page 27890]]

impact on affected LTCHs nor will there be an effect on beneficiaries' 
access to care or in quality of patient care.
    Comment: Several commenters believe that those policies that we 
proposed for RY 2007 which would, if implemented, result in reductions 
to the amounts paid by Medicare to LTCHs for RY 2007, were based on 
materially flawed data that do not support the payment changes 
presented in the proposed rule. They believe that we failed to comply 
with the Federal Data Quality Act, and OMB, HHS and CMS Guidelines 
which address the quality of the data used for policy development, in 
particular, meeting standards of utility, objectivity, integrity, and 
transparency and reproducibility. Because the commenters believe that 
we have violated these data quality standards, they were deprived of 
the opportunity to submit meaningful comments, as required by the 
Administrative Procedures Act (APA), and they urge CMS to take the 
appropriate steps that would result in the withdrawal of the FY 2007 
LTCH PPS proposed rule and the publication of a new proposed rule. The 
commenters also stated that a Freedom of Information Act (FOIA) request 
for data included in the proposed rule was submitted but to date they 
have not received a written response to their FOIA request.
    Response: We disagree with the commenter's claims that the data 
utilized in the development of the RY 2007 LTCH PPS proposed rule were 
materially flawed, did not comply with the Federal Data Quality Act, 
and did not meet established OMB, Department, and Agency guidelines for 
data quality. As previously stated, the data sources used in estimating 
the payment impacts from policy changes proposed in the RY 2007 LTCH 
PPS proposed rule were the HCRIS files that contain Medicare cost 
report data, the MedPAR files that contain Medicare claims data, the 
OSCAR database and the PSF (which is maintained by the FIs and used in 
paying Medicare claims). These are the best and most reliable data 
sources available to CMS for modeling the impacts of policy changes. We 
note that these same databases are used in modeling payment impacts 
under the IPPS, the outpatient PPS, the IRF PPS and the IPF PPS, as 
well as other Medicare payment systems. In addition to our posting the 
impact files from the LTCH PPS proposed rule on the CMS website, as 
always, commenters had access to the same CMS data files that we 
utilized through communication with our Office of Information Services 
(OIS).
    The fact that the data we used in the development of the RY 2007 
LTCH PPS proposed rule were available and transparent to the public was 
attested to by the detailed data analyses included with a significant 
number of the public comments we received on the RY 2007 LTCH PPS 
proposed rule. Therefore, for the reasons stated above, we disagree 
with the commenters' assertions that the data used by CMS in the RY 
2007 LTCH PPS proposed rule does not meet transparency and 
reproducibility standards. As is the case with any change in policy, 
modifications to current policy are not based on erroneous assumptions, 
but rather analyses of applicable data and comments submitted in 
response to the proposed rule. Staffing constraints precluded our 
Freedom of Information Group from expeditiously processing the FOIA 
request. However, we again note that the data requested via the FOIA 
process was available to the public through our OIS department. The 
fact that the data were readily available to the public is evidenced by 
the inclusion of the results of the publics' analysis of our data in 
many of the comments we received on the RY 2007 LTCH PPS proposed rule.
    Comment: A number of commenters noted that Medicare spending on 
LTCHs is about 1.4 percent of total Medicare spending, and stated that 
the CMS policies for RY 2007, that would result in over an 11 percent 
cut in Medicare spending on LTCHs, would have a disproportionate impact 
on LTCHs.
    Response: It is widely understood that since there are over 3,500 
acute care hospitals nationwide and just under 400 LTCHs, that a 
significant majority of Medicare patients requiring long-stay hospital-
level care are being treated in short-term acute-care hospitals 
throughout the country. Furthermore, notice has been taken that where 
for FY 2006, the standard Federal payment under the IPPS (for operating 
and capital costs) is about $5,200, while for RY 2006, it is about 
$38,086 under the LTCH PPS. Therefore, in response to the comment about 
the particular financial impact on LTCHs among Medicare providers of 
our proposed policies, we would note that although presently LTCHs 
serve only a relatively small percentage of Medicare beneficiaries, the 
costs per beneficiary are the highest among Medicare provider types.
    Furthermore, as noted in MedPAC's March 2006 Report to the 
Congress, the growth in Medicare spending for LTCHs in 2004 alone was 
close to 38 percent. From 2001 through 2004, the number of Medicare 
beneficiaries using LTCHs rose 13 percent per year, the supply of LTCHs 
increased 9 percent per year, the volume of services increased 12 
percent annually, while Medicare spending on LTCHs rose 25 percent per 
year. As discussed in section VI.C.3. of the preamble to this final 
rule, based on our case-mix and margins analyses, we believe that a 
zero percent update to the Federal rate is appropriate to account for 
changes in coding practices that are not attributable to an increase in 
LTCH patient severity. In addition, the zero percent update to the 
Federal rate for RY 2007 is consistent with MedPAC's recommendation.
    Additionally, while we are modifying the proposed SSO policy 
changes presented in the proposed rule (as discussed in section 
VI.A.1.a. of the preamble of this final rule), it is still incumbent 
upon us, in light of the unintended financial incentive that may exist 
under the current SSO policy for LTCHs to admit very short stay cases 
that could otherwise receive appropriate treatment at an acute-care 
hospital and be paid under the IPPS, to revisit and refine payments for 
short-stay patients at LTCHs. We also wish to emphasize that our 
policies are not dictated by budgetary limitations; rather they are 
based on making appropriate payments to services provided to Medicare 
patients.

B. Anticipated Effects of Payment Rate Changes

    We discuss the impact of the changes to the payment rates, factors, 
and policies presented in this final rule in terms of their fiscal 
impact on the Medicare budget and on LTCHs.
1. Budgetary Impact
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs ``maintain budget neutrality.'' As discussed above in this 
section, we believe that the statute's mandate for budget neutrality 
applies only to the first year of the implementation of the LTCH PPS 
(that is, FY 2003). Therefore, in calculating the FY 2003 standard 
Federal rate under Sec.  412.523(d)(2), we set total estimated payments 
for FY 2003 under the LTCH PPS so that aggregate payments under the 
LTCH PPS are estimated to equal the amount that would have been paid if 
the LTCH PPS had not been implemented. However, as discussed in greater 
detail in the August 30, 2002 final rule (67 FR 56033 through 56036), 
the FY 2003 LTCH PPS standard Federal rate ($34,956.15) was calculated 
based on all LTCHs being paid 100 percent of the standard Federal rate 
in FY 2003. As discussed in section V.D.5. of the preamble to this 
final rule, we will

[[Page 27891]]

apply a budget neutrality offset to payments to account for the 
monetary effect of the 5-year transition period and the policy to 
permit LTCHs to elect to be paid based on 100 percent of the standard 
Federal rate rather than a blend of Federal prospective payments and 
reasonable cost-based payments during the transition. The amount of the 
offset is equal to 1 minus the ratio of the estimated payments based on 
100 percent of the LTCH PPS Federal rate to the projected total 
Medicare program payments that will be made under the transition 
methodology and the option to elect payment based on 100 percent of the 
Federal prospective payment rate.
2. Impact on Providers
    The basic methodology for determining a LTCH PPS payment is set 
forth in Sec.  412.515 through Sec.  412.525. In addition to the basic 
LTC-DRG payment (standard Federal rate multiplied by the LTC-DRG 
relative weight), we make adjustments for differences in area wage 
levels, COLA for Alaska and Hawaii, and SSOs. Furthermore, LTCHs may 
also receive HCO payments for those cases that qualify based on the 
threshold established each rate year. Section 412.533 provides for a 5-
year transition to payments based on 100 percent of the Federal 
prospective payment rate. During the 5-year transition period, payments 
to LTCHs are based on an increasing percentage of the LTCH PPS Federal 
rate and a decreasing percentage of payment based on reasonable cost-
based methodology. Section 412.533(c) provides for a one-time 
opportunity for LTCHs to elect payments based on 100 percent of the 
LTCH PPS Federal rate.
    To understand the impact of these changes to the LTCH PPS discussed 
in this final rule on different categories of LTCHs for the 2007 LTCH 
PPS rate year, it is necessary to estimate payments per discharge under 
the LTCH PPS rates, factors and policies established for the RY 2006 
LTCH PPS final rule and to estimate payments per discharge that will be 
made under the LTCH PPS rates, factors and policies for the 2007 LTCH 
PPS rate year (as discussed in the preamble of this final rule). We 
also evaluated the percent change in payments per discharge of 
estimated 2006 LTCH PPS rate year payments to estimated 2007 LTCH PPS 
rate year payments for each category of LTCHs.
    Hospital groups were based on characteristics provided in the OSCAR 
data, FY 2001 through FY 2003 cost report data in HCRIS, and PSF data. 
Hospitals with incomplete characteristics were grouped into the 
``unknown'' category. Hospital groups include:
     Location: Large Urban/Other Urban/Rural.
     Participation date.
     Ownership control.
     Census region.
     Bed size.
    To estimate the impacts among the various categories of existing 
providers (that is, those that are not defined as ``new'' as under 
Sec.  412.23(e)(4)) during the LTCH PPS transition period, it is 
necessary that reasonable cost-based methodology payments and 
prospective payments contain similar inputs. As discussed in section IX 
of the preamble of this final rule, under Sec.  412.533(d), ``new'' 
LTCHs will not participate in the 5-year transition from reasonable 
cost-based reimbursement to prospective payment, and therefore, no 
portion of their LTCH PPS payments are based on reasonable cost-based 
principles. In the impact analysis showing the impact reflecting the 
applicable transition blend percentages of prospective payments and 
reasonable cost-based methodology payments and the option to elect 
payment based on 100 percent of the Federal rate (see Table 17), for 
existing LTCHs, we estimated payments only for those providers for whom 
we are able to calculate payments based on reasonable cost-based 
methodology. For example, if we did not have at least 2 years of 
historical cost data for a LTCH, we were unable to determine an update 
to the LTCH's target amount to estimate payment under reasonable cost-
based methodology. However, we were able to estimate payments for all 
new LTCHs since no portion of their estimated LTCH PPS payments are 
based on the reasonable cost methodology. As a result, only case-mix 
data is necessary to calculate their LTCH PPS payments.
    Using LTCH cases from the FY 2005 MedPAR file and cost data from FY 
1999 through FY 2003 to estimate payments under the current reasonable 
cost-based principles, we have obtained both case-mix and cost data (if 
required) for 347 LTCHs. Thus, for the impact analyses reflecting the 
applicable transition blend percentages of prospective payments and 
reasonable cost-based methodology payments and the option to elect 
payment based on 100 percent of the Federal rate (see Table 16), we 
used data from 347 LTCHs. While currently there are just under 400 
LTCHs, the most recent growth is predominantly in for-profit LTCHs that 
provide respiratory and ventilator-dependent patient care. We believe 
that the discharges from the FY 2005 MedPAR data for the 347 LTCHs in 
our database, which includes 232 proprietary LTCHs, provide sufficient 
representation in the LTC-DRGs containing discharges for patients who 
received respiratory and ventilator-dependent care based on the 
relatively large number of LTCH cases in LTC-DRGs for these diagnoses. 
However, using cases from the FY 2005 MedPAR file we had case-mix data 
for 363 LTCHs. Cost data to determine current payments under reasonable 
cost-based methodology payments are not needed to simulate payments 
based on 100 percent of the Federal rate. Therefore, for the impact 
analyses reflecting fully phased-in prospective payments (see Table 17) 
we used data from 363 LTCHs.
    These impacts reflect the estimated ``losses'' or ``gains'' among 
the various classifications of LTCHs for the 2006 LTCH PPS rate year 
(July 1, 2005 through June 30, 2006) compared to the 2007 LTCH PPS rate 
year (July 1, 2006 through June 30, 2007). Prospective payments for the 
2006 LTCH rate year were based on the standard Federal rate of 
$38,086.04, the outlier fixed-loss amount of $10,501, and the 
hospitals' estimated case-mix based on FY 2005 LTCH claims data. 
Estimated prospective payments for the 2007 LTCH PPS rate year will be 
based on the standard Federal rate of $38,086.04 (based on the zero 
percent update discussed in section V.C.3. of the preamble to this 
final rule), the outlier fixed-loss amount of $14,887, and the same FY 
2005 LTCH claims data.
3. Calculation of Prospective Payments
    To estimate payments under the LTCH PPS, we simulated payments on a 
case-by-case basis by applying the payment policy for SSOs (as 
described in section VI.A.1. of the preamble of this final rule), the 
adjustments for area wage differences (as described in section V.D.1. 
of the preamble of this final rule), and for the cost-of-living for 
Alaska and Hawaii (as described in section V.D.2. of the preamble of 
this final rule). Additional payments will also be made for HCOs (as 
described in section V.D.3. of this final rule). As noted in section 
V.D.4. of this final rule, we are not making adjustments for rural 
location, geographic reclassification, indirect medical education 
costs, or a DSH payment for the treatment of low-income patients 
because sufficient new data have not been generated that would enable 
us to conduct a comprehensive reevaluation of these payment 
adjustments. We adjusted for area wage differences for estimated 2006 
LTCH PPS rate year payments by computing a weighted average of a LTCH's 
applicable wage index during the period from July 1, 2005 through June 
30, 2006 because some providers may experience a change in the wage 
index phase-in

[[Page 27892]]

percentage during that period. For cost reporting periods beginning on 
or after October 1, 2004 and before September 30, 2005 (FY 2005), the 
labor portion of the Federal rate was adjusted by three-fifths of the 
applicable LTCH PPS wage index. For cost reporting periods beginning on 
or after October 1, 2005 and before September 30, 2006 (FY 2006), the 
labor portion of the Federal rate is adjusted by four-fifths of the 
applicable LTCH PPS wage index. Therefore, during RY 2006, a provider 
with a cost reporting period that began October 1, 2005 would have 3 
months of payments under the three-fifths wage index value and 9 months 
of payments under the four-fifths wage index value. For this provider, 
we computed a blended wage index of 25 percent (3 months/12 months) of 
the three-fifths wage index value and 75 percent (9 months/12 months) 
of the four-fifths wage index value. The applicable LTCH PPS wage index 
values for the 2006 LTCH PPS rate year are shown in Tables 1 and 2 of 
the Addendum to the RY 2006 LTCH PPS final rule (70 FR 24224 through 
24247). We adjusted for area wage differences for estimated 2006 LTCH 
PPS rate year payments using the current LTCH PPS labor-related share 
of 72.885 percent (70 FR 24182).
    Similarly, we adjusted for area wage differences for estimated 2007 
LTCH PPS rate year payments by computing a weighted average of a LTCH's 
applicable wage index during the period from July 1, 2006 through June 
30, 2007 because some providers may experience a change in the wage 
index phase-in percentage during that period. For cost reporting 
periods that began on or after October 1, 2005 and on or before 
September 30, 2006 (FY 2006), the labor portion of the Federal rate is 
adjusted by four-fifths of the applicable LTCH PPS wage index. For cost 
reporting periods beginning on or after October 1, 2006, the labor 
portion of the Federal rate is adjusted by the full (five-fifths) 
applicable LTCH PPS wage index. The applicable LTCH PPS wage index 
values for the 2007 LTCH PPS rate year are shown in Tables 1 and 2 of 
the Addendum to this final rule. We adjusted for area wage differences 
for estimated 2007 LTCH PPS rate year payments using the LTCH PPS 
labor-related share of 75.665 percent (see section V.D.1.c. of this 
final rule).
    For those providers projected to receive payment under the 
transition blend methodology, we also calculated payments using the 
applicable transition blend percentages. During the 2006 LTCH PPS rate 
year, based on the transition blend percentages set forth in Sec.  
412.533(a), some providers may experience a change in the transition 
blend percentage during the period from July 1, 2005 through June 30, 
2006. For example, during the period from July 1, 2005 through June 30, 
2006, a provider with a cost reporting period beginning on October 1, 
2004 (which is paid under the 40/60 transition blend (40 percent of 
payments based on reasonable cost-based methodology and 60 percent of 
payments under the Federal rate)) had 3 months (July 1, 2005 through 
September 30, 2005) under the 40/60 blend and 9 months (October 1, 2005 
through June 30, 2006) of payment under the 20/80-transition blend (20 
percent of payments based on reasonable cost-based methodology and 80 
percent of payments under the Federal rate). The 20/80 transition blend 
will continue until the provider's cost reporting period beginning on 
October 1, 2006 (FY 2007).
    Similarly, during the 2007 LTCH PPS rate year, based on the 
transition blend percentages set forth in Sec.  412.533(a), some of the 
providers that will be paid under the transition blend methodology may 
experience a change in the transition blend percentage during the 
period from July 1, 2006 through June 30, 2007. For example, during the 
period from July 1, 2006 through June 30, 2007, a provider with a cost 
reporting period beginning on October 1, 2005 (which is paid under the 
20/80 transition blend) will have 3 months (July 1, 2006 through 
September 30, 2006) under the 20/80 blend and 9 months (October 1, 2006 
through June 30, 2007) of payment based on 100 percent of Federal rate 
payments under the LTCH PPS (and zero percent based on reasonable cost-
based methodology). The provider will continue to receive payments 
based on 100 percent of the LTCH PPS Federal rate for its cost 
reporting period beginning on October 1, 2006 (FY 2007) and for its 
subsequent cost reporting periods.
    In estimating blended transition payments, we estimated payments 
based on the reasonable cost-based methodology, in accordance with the 
requirements at section 1886(b) of the Act. For those providers who 
have not already made the election (as determined from PSF data) to be 
paid based on 100 percent of the Federal rate, we compared the 
estimated blended transition payment to the LTCH's estimated payment if 
it would elect payment based on 100 percent of the Federal rate. If we 
estimated that the LTCH would be paid more based on 100 percent of the 
Federal rate, we assumed that it would elect to bypass the transition 
methodology and would receive payments based on 100 percent of the 
Federal rate.
    We applied the applicable budget neutrality offset to payments to 
account for the effect of the 5-year transition methodology and 
election of payment based on 100 percent of the Federal rate on 
Medicare program payments (established in the August 30, 2002 final 
rule (67 FR 56034)). In estimating both RY 2006 and RY 2007 LTCH PPS 
payments, we applied the 0.0 percent (a budget neutrality factor of 
1.0) budget neutrality offset to payments to account for the effect of 
the 5-year transition methodology and election of payment based on 100 
percent of the Federal rate on Medicare program payments to each LTCH's 
estimated payments under the LTCH PPS for the 2006 and 2007 LTCH PPS 
rate years. (See the RY 2006 LTCH PPS final rule (70 FR 24202) and 
section IV.D.5. of this final rule.) The impact, based on our 
projection using the best available data for 347 LTCHs that 
approximately 2 percent of LTCHs will be paid based on the transition 
blend methodology and 98 percent of LTCHs will elect payment based on 
100 percent of the Federal rate is shown in Table 16.
    In Table 17, we also show the impact if all LTCHs would be paid 100 
percent of the Federal rate; that is, as if there were a mandatory 
immediate transition to fully Federal prospective payments under the 
LTCH PPS for the 2006 LTCH PPS rate year and the 2007 LTCH PPS rate 
year. In the impact analysis shown in Table 17, the respective budget 
neutrality adjustments to account for the 5-year transition methodology 
on LTCHs' Medicare program payments for the 2006 and 2007 LTCH PPS rate 
years (0.0 percent in both RY 2006 and RY 2007) were not applied to 
LTCHs' estimated payments under the LTCH PPS.
    Tables 16 and 17 illustrate the estimated aggregate impact of the 
payment system among various classifications of LTCHs.
     The first column, LTCH Classification, identifies the type 
of LTCH.
     The second column lists the number of LTCHs of each 
classification type.
     The third column identifies the number of long-term care 
cases.
     The fourth column shows the estimated payment per 
discharge for the 2006 LTCH PPS rate year.
     The fifth column shows the estimated payment per discharge 
for the 2007 LTCH PPS rate year.
     The sixth column shows the estimated percent change in 
estimated payments per discharge from the 2006 LTCH PPS rate year to 
the 2007 LTCH

[[Page 27893]]

PPS rate year for changes to the area wage adjustment at Sec.  
412.525(c) (as discussed in section V.D.1. of the preamble of this 
final rule).
     The seventh column shows the estimated percent decrease in 
estimated payments per discharge from the 2006 LTCH PPS rate year to 
the 2007 LTCH PPS rate year for changes to the SSO policy at Sec.  
412.529 (as discussed in section VI.A.1.a. of the preamble of this 
final rule).
     The eighth column shows the percent decrease in estimated 
payments per discharge from the 2006 LTCH PPS rate year to the 2007 
LTCH PPS rate year for all changes (as discussed in the preamble of 
this rule).

  Table 16.--Projected Impact Reflecting Applicable Transition Blend Percentages of Prospective Payments and Reasonable Cost-Based (TEFRA) Payments and
                                          Option To Elect Payment Based on 100 Percent of the Federal Rate \1\
                         [Estimated 2006 LTCH PPS rate year payments compared to estimated 2007 LTCH PPS rate year payments] \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Percent
                                                                                                           decrease \5\       Percent         Percent
                                                                                                            in payments    decrease \5\    decrease \5\
                                                                            Average RY      Average RY     per discharge    in payments     in payments
           LTCH classification               Number of    Number of LTCH   2006 LTCH PPS   2007 LTCH PPS   from RY 2006    per discharge   per discharge
                                               LTCHs           cases        payment per     payment per   to RY 2007 for   from RY 2006    from RY 2006
                                                                             case \3\        case \4\        area wage    to RY 2007 for  to RY 2007 for
                                                                                                            adjustment    changes to the    all changes
                                                                                                            changes \6\   SSO policy \7\        \8\
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Providers...........................             347         125,095         $33,208         $31,963             0.6             3.6             3.7
By Location:
    Rural...............................              22           4,549          27,014          25,445             2.9             3.1             5.8
    Urban...............................             325         120,546          33,442          32,209             0.5             3.6             3.7
    Large...............................             173          74,841          34,281          33,225            -0.1             3.5             3.1
    Other...............................             152          45,705          32,068          30,544             1.5             3.6             4.8
By Participation Date:
    Before Oct. 1983....................              14           7,733          28,212          27,402            -0.5             3.8             2.9
    Oct. 1983-Sept. 1993................              44          22,598          34,793          33,698            -0.1             3.6             3.1
    Oct. 1993-Sept. 2002................             200          72,061          33,036          31,756             0.7             3.5             3.9
    After Oct. 2002.....................              89          22,703          33,879          32,447             1.0             3.6             4.2
By Ownership Control:
    Voluntary...........................              69          24,463          32,377          30,974             0.6             4.1             4.3
    Proprietary.........................             232          91,066          33,308          32,119             0.5             3.4             3.6
    Government..........................              10           2,368          30,055          28,664             1.3             3.5             4.6
    Unknown.............................              36           7,198          35,814          34,431             0.9             3.4             3.9
By Census Region:
    New England.........................              13           9,641          28,013          27,218            -0.8             4.1             2.8
    Middle Atlantic.....................              17           5,644          33,731          32,491             0.7             3.3             3.7
    South Atlantic......................              24           8,766          37,107          35,776             0.6             3.5             3.6
    East North Central..................              50          15,550          37,175          35,848             0.5             3.5             3.6
    East South Central..................              15           4,934          33,723          32,127             1.5             3.6             4.7
    West North Central..................              17           5,046          36,558          35,084             1.0             3.5             4.0
    West South Central..................              90          40,177          29,601          28,278             1.2             3.6             4.5
    Mountain............................              19           5,796          34,771          33,762            -0.5             3.8             2.9
    Pacific.............................              13           6,838          40,880          40,592            -1.9             3.1             0.7
By Bed Size:
    Beds: 0-24..........................              26           4,219          33,049          31,389             1.7             3.6             5.0
    Beds: 25-49.........................             164          41,796          33,546          32,081             1.1             3.6             4.4
    Beds: 50-74.........................              56          21,825          33,307          32,056             0.6             3.6             3.8
    Beds: 75-124........................              40          20,064          34,428          33,399             0.0             3.4             3.0
    Beds: 125-199.......................              24          22,264          31,069          29,949             0.4             3.6             3.6
    Beds: 200+..........................              11          10,551          33,043          32,265            -0.8             3.6             2.4
    Unknown.............................              26           4,376          35,336          33,861             1.2             3.4            4.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ As discussed above, this impact analysis reflects the applicable transition methodology (i.e., the applicable blend percentages of the Federal rate
  and reasonable cost-based methodology payments or the option to elect payment based on 100 percent of the Federal rate) for existing LTCHs, and
  therefore, only includes those existing LTCHs (347) that have cases in the FY 2005 MedPAR files for whom we are able to calculate payments based on
  the reasonable cost-based methodology.
\2\ These calculations take into account that some providers may experience a change in the LTCH PPS blend percentage changes during the 2006 and 2007
  LTCH PPS rate years. For example, during the period of July 1, 2006 through June 30, 2007, a provider with a cost reporting period beginning October
  1, 2005 will have 3 months (July 1, 2006 through September 30, 2006) of payments under the 20/80 blend (\4/5\ wage index) and 9 months (October 1,
  2006 through June 30, 2007) of payment under the full \5/5\ wage index).
\3\ Estimated average payment per case for the 12-month period of July 1, 2005 through June 30, 2006.
\4\ Estimated average payment per case for the 12-month period of July 1, 2006 through June 30, 2007.
\5\ As the percent change shown in this column represents an estimated percent decrease in payments per discharge, a negative (i.e., minus) sign
  indicates an estimated percent increase in payments per discharge and the absence of a sign (i.e., a positive sign) indicates an estimated percent
  decrease in payments per discharge.
\6\ Percent change in estimated payments per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year for the changes to the area wage
  adjustment policy at Sec.   412.525(c) (as discussed in section V.D.1. of the preamble of this final rule).
\7\ Percent decrease in estimated payments per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year for the changes to the SSO
  policy at Sec.   412.529 (as discussed in section VI.A.1.a. of the preamble of this final rule).

[[Page 27894]]

 
\8\ Percent decrease in estimated payments per discharge from the 2006 LTCH PPS rate year (as established in the RY 2006 LTCH PPS final rule (70 FR
  24168 through 24261)) to those for the 2007 LTCH PPS rate year (as discussed in the preamble of this final rule). Note, this column, which shows the
  estimated percent decrease in payments per discharge for all changes, may not exactly equal the sum of the estimated percent decrease in payments per
  discharge for area wage adjustment changes (column 6) and for SSO policy changes (column 7) due to the effect of estimated changes in aggregate high
  cost outlier payments as well as other interactive effects that cannot be isolated.


                              Table 17.--Projected Impact Reflecting the Fully Phased-In LTCH PPS Prospective Payments \1\
                         [Estimated 2006 LTCH PPS rate year payments compared to estimated 2007 LTCH PPS rate year payments] \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Percent
                                                                                                           decrease \5\       Percent         Percent
                                                                                                            in payments    decrease \5\    decrease \5\
                                                                            Average RY      Average RY     per discharge    in payments     in payments
           LTCH classification               Number of    Number of LTCH   2006 LTCH PPS   2007 LTCH PPS   from RY 2006    per discharge   per discharge
                                               LTCHs           cases        payment per     payment per   to RY 2007 for   from RY 2006    from RY 2006
                                                                             case \3\        case \4\        area wage    to RY 2007 for  to RY 2007 for
                                                                                                            adjustment    changes to the    all changes
                                                                                                            changes \6\   SSO policy \7\        \8\
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Providers...........................             363         128,989         $33,212         $31,983            -0.6             3.6             3.7
By Location:
    Rural...............................              24           5,009          26,832          25,281            -3.1             3.0             5.8
    Urban...............................             339         123,980          33,470          32,253            -0.5             3.6             3.6
    Large...............................             180          77,385          34,355          33,314             0.1             3.5             3.0
    Other...............................             159          46,595          32,000          30,493            -1.5             3.6             4.7
By Participation Date:
    Before Oct. 1983....................              15           7,925          28,051          27,274             0.5             3.7             2.8
    Oct. 1983-Sept. 1993................              44          22,598          34,771          33,692             0.1             3.7             3.1
    Oct. 1993-Sept. 2002................             208          75,331          33,106          31,844            -0.7             3.5             3.8
    After Oct. 2002.....................              89          22,703          33,879          32,447            -1.0             3.6             4.2
    Unknown.............................               7             432          29,681          28,836             0.1             3.4             2.8
By Ownership Control:
    Voluntary...........................              71          25,789          32,398          31,025            -0.6             4.1             4.2
    Proprietary.........................             238          92,562          33,262          32,083            -0.5             3.4             3.5
    Government..........................              10           2,368          30,032          28,667            -1.3             3.5             4.5
    Unknown.............................              44           8,270          36,104          34,797            -0.7             3.3             3.6
By Census Region:
    New England.........................              14            9,83          27,888          27,122             0.8             4.0             2.7
    Middle Atlantic.....................              28           7,667          34,813          33,626            -0.5             3.3             3.4
    South Atlantic......................              42          13,594          37,084           35,72            -0.6             3.5             3.7
    East North Central..................              65          18,514          37,421          36,030            -0.6             3.6             3.7
    East South Central..................              28           7,490          33,442          31,784            -1.7             3.7             5.0
    West North Central..................              18           5,125          36,543          35,057            -1.0             3.6             4.1
    West South Central..................             130          52,411          29,679          28,372            -1.2             3.5             4.4
    Mountain............................              22           6,341          35,121          34,060             0.4             3.9             3.0
    Pacific.............................              16           8,014          41,173          40,871             1.8             3.1             0.7
By Bed Size:
    Beds: 0-24..........................              29           4,751          32,650         31,0102            -1.6             3.5             4.7
    Beds: 25-49.........................             168          43,400          33,628           2,181            -1.1             3.6             4.3
    Beds: 50-74.........................              56          21,825          33,307          32,069            -0.6             3.6             3.7
    Beds: 75-124........................              40          20,064          34,425          33,412             0.0             3.4             2.9
    Beds: 125-199.......................              25          23,398          31,266           30,14            -0.3             3.6             3.6
    Beds: 200 +.........................              12          10,743          32,838          32,086             0.8             3.6             2.3
    Unknown.............................              33           4,808          34,828          33,409            -1.1             3.4             4.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ As discussed above, this impact analyses reflects fully phased-in prospective payments, and therefore, cost data to determine current payments under
  reasonable cost-based methodology payments are not needed. Therefore, we are able to use all of the LTCHs (363) that have cases in the FY 2005 MedPAR
  files.
\2\ These calculations take into account that some providers may experience a change in the LTCH PPS blend percentage changes during the 2006 and 2007
  LTCH PPS rate years. For example, during the period of July 1, 2006 through June 30, 2007, a provider with a cost reporting period beginning October
  1, 2005 will have 3 months (July 1, 2006 through September 30, 2006) of payments under the 20/80 blend (\4/5\ wage index) and 9 months (October 1,
  2006 through June 30, 2007) of payment under the full (\5/5\) wage index.
\3\ Estimated average payment per case for the 12-month period of July 1, 2005 through June 30, 2006.
\4\ Estimated average payment per case for the 12-month period of July 1, 2006 through June 30, 2007.
\5\ As the percent change shown in this column represents an estimated percent decrease in payments per discharge, a negative (i.e., minus) sign
  indicates an estimated percent increase in payments per discharge and the absence of a sign (i.e., a positive sign) indicates an estimated percent
  decrease in payments per discharge.
\6\ Percent change in estimated payments per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year for the changes to the area wage
  adjustment policy at Sec.   412.525(c) (as discussed in section V.D.1. of the preamble of this final rule).
\7\ Percent decrease in estimated payments per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year for the changes to the SSO
  policy at Sec.   412.529 (as discussed in section VI.A.1.a. of the preamble of this final rule).
\8\ Percent decrease in estimated payments per discharge from the 2006 LTCH PPS rate year (as established in the RY 2006 LTCH PPS final rule (70 FR
  24168 through 24261)) to those for the 2007 LTCH PPS rate year (as discussed in the preamble of this final rule). Note, this column, which shows the
  estimated percent decrease in payments per discharge for all changes, may not exactly equal the sum of the estimated percent decrease in payments per
  discharge for area wage adjustment changes (column 6) and for SSO policy changes (column 7) due to the effect of estimated changes in aggregate high
  cost outlier payments as well as other interactive effects that cannot be isolated.


[[Page 27895]]

4. Results
    Based on the most recent available data (as described previously 
for 347 LTCHs), we have prepared the following summary of the impact 
(as shown above in Table 16) of the LTCH PPS set forth in this final 
rule. The impact analysis in Table 16 shows that estimated payments per 
discharge are expected to decrease approximately 3.7 percent on average 
for all LTCHs from the 2006 LTCH PPS rate year as compared to the 2007 
LTCH PPS rate year as a result of the changes presented in this final 
rule. As noted previously, the estimated percent decrease in payments 
per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS 
rate year is largely attributable to the change in the payment formula 
for SSO cases (discussed in section VI.A.1.a. of this final rule). 
Specifically, under the changes to the SSO policy for RY 2007, the vast 
majority of LTCH SSO cases (which is approximately 37 percent of all 
LTCH cases) will receive a lower payment than under the current SSO 
policy. We believe the revisions we are establishing to the SSO policy 
in this final rule are appropriate, as discussed in greater detail in 
section VI.A.1.a. of the preamble of this final rule, given that many 
of these very short-stay cases most likely do not receive a full course 
of a LTCH-level of treatment in such a short period of time since, in 
general, LTCHs are intended to treat patients with an ALOS of greater 
than 25 days. Furthermore, since most SSO cases which were admitted to 
the LTCH directly from an acute-care hospital, they may still be in 
need of acute-level care at the time of admission to the LTCH, which 
may indicate a premature and inappropriate discharge from the acute-
care hospital and inappropriate admissions to the LTCH. Therefore, we 
believe that the changes to the SSO policy will result in more 
appropriate payments for short-stay cases treated at LTCHs.
    As we discussed in greater detail in section V.D.3.c. of the 
preamble of this final rule, given the regulatory requirement at Sec.  
412.525(a) estimated outlier payments equal to 8 percent of estimated 
total LTCH PPS payments, this estimated decrease in LTCH PPS payments 
for RY 2007 resulting from the changes to the SSO policy requires an 
increase in the HCO fixed-loss amount in order to maintain estimated 
outlier payments at 8 percent of the reduced estimated total LTCH PPS 
payments (resulting from the changes to the SSO policy and other policy 
changes presented in this final rule). Thus, the increase in the 
outlier fixed-loss amount also contributes to the decrease in payments 
per discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS 
rate year. For example, many LTCHs are expected to receive a decrease 
in HCO payments. As a result of the increase to the fixed-loss amount 
from the 2006 LTCH PPS rate year ($10,501) to the 2007 LTCH PPS rate 
year ($14,887), fewer cases will qualify as outlier cases (that is, the 
estimated cost of the case exceeds the outlier threshold). Since many 
LTCHs are expected to receive fewer outlier payments, total estimated 
payments per discharge are expected to decrease (as discussed in 
section V.D.3. of this final rule).
    As we discussed in greater detail in section V.D.1. of the preamble 
of this final rule, we are updating the wage index values for RY 2007 
and continuing with the progression of the 5-year phase-in of the wage 
index adjustment. In addition, we are increasing the labor-related 
share from 72.885 percent to 75.665 percent under the LTCH PPS 
beginning in RY 2007. LTCHs located in areas with a RY 2007 wage index 
value that is greater than 1.0 will experience an increase in payments 
per discharge as a result of the increase in the labor-related share 
and the progression of the 5-year phase-in of the wage index 
adjustment. Thus, the changes to the wage index adjustment established 
in this final rule for LTCHs located in areas with a RY 2007 wage index 
value that is greater than 1.0 are expected to mitigate some of the 
projected decrease in payments per discharge that will result from the 
changes to the SSO policy and the outlier threshold. Similarly, LTCHs 
located in areas with a RY 2007 wage index value that is less than 1.0 
are expected to experience a decrease in payments per discharge as a 
result of the increase in the labor-related share and the progression 
of the 5-year phase-in of the wage index adjustment. Consequently, the 
changes to the wage index adjustment established in this final rule for 
LTCHs located in areas with a RY 2007 wage index value that is less 
than 1.0 are expected to also contribute to the projected decrease in 
payments per discharge from RY 2006 as compared to RY 2007.
a. Location
    Based on the most recent available data, the majority of LTCHs are 
in urban areas. Approximately 6 percent of the LTCHs are identified as 
being located in a rural area, and approximately 3.6 percent of all 
LTCH cases are treated in these rural hospitals. The impact analysis in 
Table 16 shows that the percent decrease in estimated payments per 
discharge for the 2006 LTCH PPS rate year compared to the 2007 LTCH PPS 
rate year for rural LTCHs will be 5.8 percent, and will be 3.7 percent 
for urban LTCHs. While rural LTCHs are expected to experience a smaller 
decrease in payments due to the changes in the SSO policy because they 
treat a smaller percentage of SSO cases, they are projected to 
experience a higher decrease in payments per discharge as a result of 
the changes to the area wage adjustment (discussed in section V.D.1. of 
the preamble of this final rule). Specifically, rural LTCHs are 
expected to experience a higher decrease in payments per discharge as a 
result of the changes to the area wage adjustment. The wage index for 
all rural LTCHs is less than 1.0, and therefore, they are expected to 
experience a decrease in payments per discharge as a result of the 
increase in the labor-related share and the progression of the 5-year 
phase-in of the wage index adjustment.
    Large urban LTCHs are projected to experience a 3.1 percent 
decrease in payments per discharge from the 2006 LTCH PPS rate year 
compared to the 2007 LTCH PPS rate year, while other urban LTCHs are 
projected to experience a 4.8 percent decrease in payments per 
discharge from the 2006 LTCH PPS rate year compared to the 2007 LTCH 
PPS rate year (see Table 16). Other urban LTCHs are projected to 
experience a higher than average decrease in payments per discharge 
primarily because of the changes to the area wage adjustment (discussed 
in section V.D.1. of the preamble of this final rule). Specifically, 
the majority of other urban LTCHs (over 80 percent) are located in 
urban areas that have a wage index value of less than 1.0, and 
therefore, are expected to experience a higher than average decrease in 
payments per discharge as a result of the increase in the labor-related 
share and the progression of the 5-year phase-in of the wage index 
adjustment. In addition, other urban LTCHs have a slightly higher 
percentage of SSO cases and therefore, are projected to experience a 
slightly higher than average decrease in payments per discharge as a 
result of the changes to the SSO policy (as discussed in greater detail 
above in this section).
b. Participation Date
    LTCHs are grouped by participation date into four categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; (3) 
between October 1993 and September 2002; and (4) after October 2002. 
Based on the most recent available data, the majority (approximately 58 
percent) of the LTCH

[[Page 27896]]

cases are in hospitals that began participating between October 1993 
and September 2002, and are projected to experience a 3.9 percent 
decrease in payments per discharge from the 2006 LTCH PPS rate year 
compared to the 2007 LTCH PPS rate year. Approximately 18 percent of 
LTCH PPS cases are in LTCHs that began participating in Medicare 
between October 1983 and September 1993, and those LTCHs are projected 
to experience a 3.1 percent decrease in payments per discharge from the 
2006 LTCH PPS rate year compared to the 2007 LTCH PPS rate year (see 
Table 16). We are projecting that LTCHs that began participating in 
Medicare between October 1983 and September 1993 will experience a 
lower than average decrease in payments for RY 2007 primarily because 
we are projecting that these LTCHs are expected to experience a slight 
increase (0.1 percent) in payments per discharge due to the changes to 
the area wage adjustment. Specifically, many of the LTCHs that began 
participating in Medicare between October 1983 and September 1993 are 
located in areas where the RY 2007 wage index value will be greater 
than the RY 2006 wage index value. In addition, several of these LTCHs 
are located in areas that have a wage index value of greater than 1.0, 
and therefore, are expected to experience a slight increase in payments 
per discharge as a result of the increase in the labor-related share 
and the progression of the 5-year phase-in of the wage index 
adjustment.
    LTCHs that began participating before October 1983 are projected to 
experience a 2.9 percent decrease in payments per discharge from the 
2006 LTCH PPS rate year compared to the 2007 LTCH PPS rate year (see 
Table 16). We are projecting that LTCHs that began participating in 
Medicare before October 1983 will experience a smaller than average 
decrease in payments for RY 2007 as compared to RY 2006 primarily 
because we are projecting that LTCHs in this participation date 
category will experience a slight increase in payments in RY 2007 as 
compared to RY 2006 due to the changes to the area wage adjustment 
(discussed in section V.D.1. of the preamble of this final rule). 
Specifically, the majority of LTCHs that began participating in 
Medicare before October 1983 are located in areas where the RY 2007 
wage index value will be greater than the RY 2006 wage index value. In 
addition, many of these LTCHs are located in areas that will have a 
wage index value of greater than 1.0, and therefore, will experience a 
slight increase in payments per discharge as a result of the increase 
in the labor-related share and the progression of the 5-year phase-in 
of the wage index adjustment. Approximately 18 percent of LTCH PPS 
cases are in LTCHs that began participating in Medicare after October 
2002 (that is, the implementation of the LTCH PPS), and those LTCHs are 
projected to experience a 4.2 percent decrease in payments per 
discharge from the 2006 LTCH PPS rate year compared to the 2007 LTCH 
PPS rate year (see Table 16). We are projecting that LTCHs that began 
participating in Medicare after October 2002 will experience a higher 
than average decrease in payments for RY 2007 primarily because we are 
projecting that these LTCHs will experience a larger decrease (-1.0 
percent) in payments per discharge due to the changes to the area wage 
adjustment. Specifically, the majority of the LTCHs that began 
participating in Medicare after October 2002 are located in areas where 
the RY 2007 wage index value will be less than the RY 2006 wage index 
value. In addition, several of these LTCHs are located in areas that 
will have a wage index value of less than 1.0, and therefore, are 
expected to experience a decrease in payments per discharge as a result 
of the increase in the labor-related share and the progression of the 
5-year phase-in of the wage index adjustment.
c. Ownership Control
    Other than LTCHs whose ownership control type is unknown, LTCHs are 
grouped into three categories based on ownership control type: 
voluntary; proprietary; and government.
    Based on the most recent available data, approximately 2.9 percent 
of LTCHs are identified as government-owned and operated. We expect 
that for these government-owned and operated LTCHs, 2007 LTCH PPS rate 
year payments per discharge will decrease 4.6 percent in comparison to 
the 2006 LTCH PPS rate year (see Table 16). We are projecting that 
government-run LTCHs will experience a higher than average decrease in 
payment in RY 2007 as compared to RY 2006 primarily due to the effect 
of the changes to the area wage adjustment (discussed in section V.D.1. 
of the preamble of this proposed rule). Specifically, all but 2 of the 
10 government-run LTCHs in our database are located in areas where the 
wage index value for RY 2007 is less than 1.0, and therefore, are 
expected to experience a higher than average decrease in payments per 
discharge as a result of the increase in the labor-related share and 
the progression of the 5-year phase-in of the wage index adjustment.
    Similarly, we project that 2007 LTCH PPS rate year payments per 
discharge for voluntary LTCHs will decrease 4.3 percent in comparison 
to the 2006 LTCH PPS rate year payments (see Table 16). We are 
projecting that voluntary LTCHs will experience a higher than average 
decrease in payments in RY 2007 as compared to RY 2006 primarily due to 
the changes to the SSO policy, since approximately two-thirds of the 
voluntary LTCHs have a higher than average percentage of SSO cases.
    The majority (approximately 67 percent) of LTCHs are identified as 
proprietary. We project that 2007 LTCH PPS rate year payments per 
discharge for these proprietary LTCHs will decrease 3.6 percent in 
comparison to the 2006 LTCH PPS rate year (see Table 16). We are 
projecting that proprietary LTCHs will experience a slightly lower than 
average decrease in payments in RY 2007 as compared to RY 2006 
primarily due to our estimate that these LTCHs will experience a 
slightly lower than average decrease in payments due to the changes to 
the SSO policy, since many proprietary LTCHs have a lower than average 
percentage of SSO cases. Proprietary LTCHs are also expected to 
experience a slightly lower than average decrease in payments from RY 
2006 to RY 2007 due to the changes to the area wage adjustment since 
several proprietary LTCHs are expected to experience an increase to 
their wage index value from RY 2006 to RY 2007.
d. Census Region
    Payments per discharge for the 2007 LTCH PPS rate year are 
estimated to decrease for LTCHs located in all regions in comparison to 
the 2006 LTCH PPS rate year. As explained in greater detail above in 
this section, the estimated percent decrease in payments per discharge 
from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year is 
largely attributable to the change in the payment formula for SSO 
cases, the changes in the area wage adjustment, and the increase in the 
outlier fixed-loss amount.
    Of the 9 census regions, we project that the estimated decrease in 
2007 LTCH PPS rate year payments per discharge in comparison to the 
2006 LTCH PPS rate year will have the largest impact on LTCHs in the 
East South Central and West South Central regions (4.7 percent and 4.5 
percent, respectively; see Table 16). LTCHs located in both the East 
and West South Central regions are expected to experience a higher than 
average decrease in payments due to the changes in the area wage 
adjustment (1.5 percent for the East South Central

[[Page 27897]]

region and 1.2 percent for the West South Central region). Since nearly 
all LTCHs located in the East South Central region and the West South 
Central region are located in areas with a wage index value that is 
less than 1.0, they are expected to experience a decrease in payments 
per discharge as a result of the increase in the labor-related share 
and the progression of the 5-year phase-in of the wage index 
adjustment.
    We project that 2007 LTCH PPS rate year payments per discharge will 
decrease the least for LTCHs in the Pacific region in comparison to the 
2006 LTCH PPS rate year (0.7 percent; see Table 16). We estimate that 
for LTCHs located in the Pacific region, the projected decrease in 
payments per discharge for the 2007 LTCH PPS rate year compared to the 
2006 LTCH PPS rate year is less than the decreases projected for other 
regions, because we are projecting an increase in estimated LTCH PPS 
payments from RY 2006 to RY 2007 as a result of the changes to the area 
wage adjustment. Specifically, we are projecting an increase in 
estimated LTCH PPS payments due to the changes to the area wage 
adjustment because all LTCHs in this region are located in areas where 
the RY 2007 wage index value is greater than the RY 2006 wage index 
value. Furthermore, all of the LTCHs located in the Pacific region are 
located in areas where the wage index value for RY 2007 is greater than 
1.0, and therefore, are expected to experience an increase in payments 
per discharge as a result of the increase in the labor-related share 
and the progression of the 5-year phase-in of the wage index 
adjustment. In addition, many of the Pacific LTCHs treat a lower than 
average percentage of SSO cases, and therefore, we project that these 
LTCHs will experience a lower than average decrease in average payments 
as a result of the changes to the SSO policy.
e. Bed Size
    LTCHs were grouped into seven categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; greater than 
200 beds; and unknown bed size.
    We are projecting a decrease in 2007 LTCH PPS rate year payments 
per discharge in comparison to the 2006 LTCH PPS rate year for all bed 
size categories. Most LTCHs are in bed size categories where 2007 LTCH 
PPS rate year payments per discharge are projected to decrease by at 
least 3.5 percent in comparison to the 2006 LTCH PPS rate year. As 
discussed in greater detail above in this section, the estimated 
percent decrease in payments per discharge from the 2006 LTCH PPS rate 
year to the 2007 LTCH PPS rate year is largely attributable to the 
change in the payment formula for SSO cases, the changes in the area 
wage adjustment, and the increase in the outlier fixed-loss amount.
    We project that LTCHs with greater than 200 beds will have the 
smallest decrease in estimated 2007 LTCH PPS rate year payments per 
discharge in comparison to the 2006 LTCH PPS rate year (2.4 percent), 
followed by LTCHs with 75-124 beds (3.0 percent). This lower than 
average decrease in projected payments per discharge for LTCHs with 
greater than 200 beds and for LTCHs with 75-124 beds is largely due to 
the changes to the area wage adjustment. Specifically, for LTCHs with 
75-124 beds, the majority of these LTCHs are located in areas where the 
change in the wage index value from RY 2006 to RY 2007 will be very 
small, and therefore, we project that the changes to the area wage 
adjustment will have a negligible impact on these LTCHs' RY 2007 
payments (0.0 percent) rather than decreasing their RY 2007 payments 
(as we estimate will be the impact of these changes for ``All 
Providers'' as shown in Table 16). For LTCHs with greater than 200 
beds, the majority of these LTCHs are located in areas where the RY 
2007 wage index value is greater than the RY 2006 wage index value. In 
addition, the majority of LTCHs with greater than 200 beds are located 
in areas where the RY 2007 wage index value is greater than 1.0, and 
therefore, are expected to experience an increase in payments per 
discharge as a result of the increase in the labor-related share and 
the progression of the 5-year phase-in of the wage index adjustment.
    Payments per discharge for the 2007 LTCH PPS rate year for LTCHs 
with 0-24 beds are projected to decrease the most in comparison to the 
2006 LTCH PPS rate year (5.0 percent; see Table 16), followed by LTCHs 
with 25-49 beds (4.4 percent; see Table 16). This higher than average 
decrease in projected payments per discharge for LTCHs with less than 
49 beds (that is, LTCHs in the 0-24 bed size category and LTCHs in the 
25-49 bed size category) is largely due to the changes to the area wage 
adjustment. Specifically, the majority of LTCHs with 49 beds or less 
are located in areas where the RY 2007 wage index value is less than 
the RY 2006 wage index value. In addition, the majority of LTCHs with 
49 beds or less are located in areas where the RY 2007 wage index is 
less than 1.0, and therefore, are expected to experience a higher than 
average decrease in payments per discharge as a result of the increase 
in the labor-related share and the progression of the 5-year phase-in 
of the wage index adjustment.
5. Effect on the Medicare Program
    Based on actuarial projections, an estimate of Medicare spending 
(total estimated Medicare program payments) for LTCH services over the 
next 5 years based on current LTCH PPS policy and based on policy 
changes established in this final rule is shown in Table 18:

                   Table 18.--Five-Year Estimated Medicare Program Payments for LTCH Services
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                                     payments       Difference
                                                                     Estimated       based on       reflecting
                                                                     payments         policy          policy
                       LTCH PPS rate year                            based on         changes         changes
                                                                      current     established in    established
                                                                   policy  ($ in    this final     in this final
                                                                     billons)       rule  ($ in     rule  ($ in
                                                                                     billions)       millions)
----------------------------------------------------------------------------------------------------------------
2007............................................................           5.267           4.917             350
2008............................................................           5.427           5.017             410
2009............................................................           5.626           5.186             440
2010............................................................           5.858           5.398             460
2011............................................................           6.131           5.641             490
----------------------------------------------------------------------------------------------------------------


[[Page 27898]]

    These estimates are based on the most recent LTCH data available, 
including the projection that 98 percent of LTCHs will elect to be paid 
based on 100 percent of the 2007 LTCH PPS rate year standard Federal 
rate rather than the applicable transition blend, and an estimated 
increase in the number of discharges from LTCHs. (We note that the 5-
year spending estimates shown in Table 18 are significantly higher than 
the 5-year spending estimates presented in the RY 2006 LTCH PPS final 
rule (70 FR 24203). This is primarily due to an adjustment by our 
Office of the Actuary (OACT) to account for the significant increase in 
the expected number of LTCH discharges based on the most recent 
available LTCH discharge data.) The estimate of payments based on 
current policy (shown in column 2 of Table 18) is based on the current 
estimate of the increase in the excluded hospital with capital market 
basket (currently used under the LTCH PPS) of 3.4 percent for the 2007 
LTCH PPS rate year, 3.1 percent for the 2008 LTCH PPS rate year, 2.8 
for the 2009 LTCH PPS rate year, 2.3 percent for the 2010 LTCH PPS rate 
year and 2.7 percent for the 2011 LTCH PPS rate year. (We note that, 
although we have established a zero percent update to the LTCH PPS 
Federal rate for RY 2007 (as discussed in section V.C.3. of this final 
rule) and are adopting the RPL market basket beginning in RY 2007 (as 
discussed in section V.B. of this final rule), OACT develops its 
spending projections based on existing policy and therefore, changes 
that have not as yet been implemented are not reflected in the spending 
projections shown in Table 18.) We estimate that there will be a change 
in Medicare fee-for-service beneficiary enrollment of -0.3 percent in 
the 2007 LTCH PPS rate year, 0.1 percent in the 2008 LTCH PPS rate 
year, 0.2 percent in the 2009 LTCH PPS rate year, -0.3 percent in the 
2010 LTCH PPS rate year, and -0.2 percent in the 2011 LTCH PPS rate 
year, and an estimated increase in the total number of LTCHs. (We note 
that, based on the most recent available data, OACT is projecting a 
decrease in Medicare fee-for-service Part A enrollment, in part, 
because they are projecting an increase in Medicare managed care 
enrollment as a result of the implementation of several provisions of 
the MMA.)
    Consistent with the statutory requirement for budget neutrality, as 
we discussed in the August 30, 2002 final rule that implemented the 
LTCH PPS, in developing the LTCH PPS, we intended for estimated 
aggregate payments under the LTCH PPS in FY 2003 would equal the 
estimated aggregate payments that would have been made if the LTCH PPS 
were not implemented. Our methodology for estimating payments for 
purposes of the budget neutrality calculations for determining the FY 
2003 standard Federal rate uses the best available data and necessarily 
reflects assumptions. As we collect data from LTCHs, we will monitor 
payments and evaluate the ultimate accuracy of the assumptions used to 
calculate the budget neutrality calculations (that is, inflation 
factors, intensity of services provided, or behavioral response to the 
implementation of the LTCH PPS). As discussed in section V.D.6. of this 
final rule, we still do not have sufficient new cost report and claims 
data generated under the LTCH PPS to enable us to conduct a 
comprehensive reevaluation of our FY 2003 budget neutrality calculation 
at this time.
    Section 123 of BBRA and section 307 of BIPA provide the Secretary 
with extremely broad authority in developing the LTCH PPS, including 
the authority for appropriate adjustments. In accordance with this 
broad authority, we may discuss in a future proposed rule a possible 
one-time prospective adjustment to the LTCH PPS rates under Sec.  
412.523(d)(3) to maintain budget neutrality so that the effect of the 
difference between actual payments and estimated payments for the first 
year of the LTCH PPS is not perpetuated in the PPS rates for future 
years. As discussed in section V.D.6. of this final rule, due to the 
lag time in the availability of Medicare data upon which this 
adjustment would be based, we have postponed the requirement 
established in existing Sec.  412.523(d)(3) from the existing October 
1, 2006 deadline to July 1, 2008.
6. Effect on Medicare Beneficiaries
    Under the LTCH PPS, hospitals receive payment based on the average 
resources consumed by patients for each diagnosis. We do not expect any 
changes in the quality of care or access to services for Medicare 
beneficiaries under the LTCH PPS, but we expect that paying 
prospectively for LTCH services will enhance the efficiency of the 
Medicare program.

C. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 19, we have 
prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this final rule. Table 
19 provides our best estimate of the decrease in Medicare payments 
under the LTCH PPS as a result of the changes presented in this final 
rule based on the data for 347 LTCHs in our database. All expenditures 
are classified as transfers to Medicare providers (that is, LTCHs).

      Table 19.--Accounting Statement: Classification of Estimated
Expenditures, From the 2006 LTCH PPS Rate Year to the 2007 LTCH PPS Rate
                                  Year
                              [In millions]
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  Negative transfer--Estimated
                                          decrease in expenditures:
                                          $156.
From Whom to Whom?.....................  Federal Government to LTCH
                                          Medicare Providers.
------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare, 
Puerto Rico, Reporting and recordkeeping requirements.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

0
1. The authority citation for part 412 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

[[Page 27899]]

Subpart O--Prospective Payment System for Long-Term Care Hospitals

0
2. Section 412.523 is amended by--
0
A. Revising paragraph (c)(3)(ii).
0
B. Adding new paragraph (c)(3)(iii).
0
C. Revising paragraph (d)(3).
    The revisions and addition read as follows:


Sec.  412.523  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (ii) For long-term care hospital prospective payment system rate 
years beginning on or after July 1, 2003 and ending on or before June 
30, 2006. The standard Federal rate for long-term care hospital 
prospective payment system rate years beginning on or after July 1, 
2003 and ending on or before June 30, 2006 is the standard Federal rate 
for the previous long-term care hospital prospective payment system 
rate year, updated by the increase factor described in paragraph (a)(2) 
of this section, and adjusted, as appropriate, as described in 
paragraph (d) of this section. For the rate year from July 1, 2003 
through June 30, 2004, the updated and adjusted standard Federal rate 
is offset by a budget neutrality factor to account for updating the FY 
2003 standard Federal rate on July 1 rather than October 1.
    (iii) For long-term care hospital prospective payment system rate 
year beginning July 1, 2006 and ending June 30, 2007. The standard 
Federal rate for long-term care hospital prospective payment system 
rate year beginning July 1, 2006 and ending June 30, 2007 is the 
standard Federal rate for the previous long-term care hospital 
prospective payment system rate year updated by zero percent. The 
standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *
    (d) * * *
    (3) One-time prospective adjustment. The Secretary reviews payments 
under this prospective payment system and may make a one-time 
prospective adjustment to the long-term care hospital prospective 
payment system rates on or before July 1, 2008, so that the effect of 
any significant difference between actual payments and estimated 
payments for the first year of the long-term care hospital prospective 
payment system is not perpetuated in the prospective payment rates for 
future years.
* * * * *

0
3. Section 412.529 is amended by--
0
A. Revising paragraph (c).
0
B. Adding new paragraph (d).
0
C. Adding new paragraph (e).
    The revision and addition read as follows:


Sec.  412.529  Special payment provision for short-stay outliers.

* * * * *
    (c) Method for determining the payment amount. (1) For discharges 
from long-term care hospitals described under Sec.  412.23(e)(2)(i), 
occurring before July 1, 2006, the LTCH prospective payment system 
adjusted payment amount for a short-stay outlier case is the least of 
the following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section;
    (ii) 120 percent of the estimated cost of the case determined under 
paragraph (d)(2) of this section; or
    (iii) The Federal prospective payment for the LTC-DRG determined 
under paragraph (d)(3) of this section.
    (2) For discharges occurring on or after July 1, 2006, from long-
term care hospitals described under Sec.  412.23(e)(2)(i), the LTCH 
prospective payment system adjusted payment amount for a short-stay 
outlier case is the least of the following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section;
    (ii) 100 percent of the estimated cost of the case determined under 
paragraph (d)(2) of this section;
    (iii) The Federal prospective payment for the LTC-DRG as determined 
under paragraph (d)(3) of this section; or
    (iv) An amount payable under subpart O computed as a blend of an 
amount comparable to the hospital inpatient prospective payment system 
per diem amount determined under paragraph (d)(4)(i) of this section 
and the 120 percent of the LTC-DRG specific per diem payment amount 
determined under paragraph (d)(1) of this section.
    (A) The blend percentage applicable to the 120 percent of the LTC-
DRG specific per diem payment amount determined under paragraph (d)(1) 
of this section is determined by dividing the covered length-of-stay of 
the case by the lesser of five-sixths of the geometric average length 
of stay of the LTC-DRG or 25 days, not to exceed 100 percent.
    (B) The blend percentage of the amount determined under paragraph 
(d)(4)(i) of this section is determined by subtracting the percentage 
determined in paragraph (A) from 100 percent.
    (3) Short-stay outlier payments. (i) For discharges occurring on or 
after October 1, 2002 and before August 8, 2003, no reconciliations are 
made to short-stay outlier payments upon cost report settlement to 
account for differences between the estimated cost-to-charge ratio and 
the actual cost-to-charge ratio of the case.
    (ii) For discharges occurring on or after August 8, 2003, short-
stay outlier payments are subject to the provisions of Sec.  
412.84(i)(1), (i)(3), and (i)(4) and (m) for adjustments of cost-to-
charge ratios.
    (iii) For discharges occurring on or after October 1, 2003, short-
stay outlier payments are subject to the provisions of Sec.  
412.84(i)(2) for adjustments to cost-to-charge ratios.
    (d) Calculation of alternative payment amounts. (1) Determining the 
LTC-DRG per diem amount. CMS calculates the LTC-DRG per diem amount for 
short-stay outliers for each LTC-DRG by dividing the product of the 
standard Federal payment rate and the LTC-DRG relative weight by the 
geometric average length of stay of the specific LTC-DRG multiplied by 
the covered days of the stay.
    (2) Determining the estimated cost of a case. To determine the 
estimated cost of a case, CMS multiplies the hospital-specific cost-to-
charge ratio by the Medicare allowable charges for the case.
    (3) Determining the Federal prospective payment for the LTC-DRG. 
CMS calculates the Federal prospective payment for the LTC-DRG by 
multiplying the adjusted standard Federal payment rate by the LTC-DRG 
relative weight.
    (4) Determining the amount comparable to the hospital inpatient 
prospective payment system per diem amount. (i) General. Under Subpart 
O, CMS calculates--
    (A) An amount comparable to what would otherwise be paid under the 
hospital inpatient prospective payment system based on the sum of the 
applicable operating inpatient prospective payment system standardized 
amount and the capital inpatient prospective payment system Federal 
rate in effect at the time of the LTCH discharge.
    (B) An amount comparable to the hospital inpatient prospective 
payment system per diem amount for each DRG that is determined by 
dividing the amount that would otherwise be paid under the hospital 
inpatient prospective payment system computed under paragraph (A) of 
this section by the hospital inpatient prospective payment system 
geometric average length of stay of the specific DRG multiplied by the 
covered days of the stay.
    (C) For purposes of the blend amount described in paragraph 
(c)(2)(iv) of this section, the payment amount specified under 
subparagraph (B) of this section

[[Page 27900]]

may not exceed the full amount comparable to what would otherwise be 
paid under the hospital inpatient prospective payment system determined 
under subparagraph (A) of this section.
    (ii) Hospital inpatient prospective payment system operating 
standardized amount. The hospital inpatient prospective payment system 
operating standardized amount--
    (A) Is adjusted for the applicable hospital inpatient prospective 
payment system DRG weighting factors.
    (B) Is adjusted for different area wage levels based on the 
geographic classifications set forth at Sec.  412.64(b)(1)(ii)(A) 
through (C) and the applicable hospital inpatient prospective payment 
system labor-related share, using the applicable hospital inpatient 
prospective payment system wage index value for non-reclassified 
hospitals. For LTCHs located in Alaska and Hawaii, this amount is also 
adjusted by the applicable hospital inpatient prospective payment 
system cost of living adjustment factors.
    (C) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    (iii) Hospital inpatient prospective payment system capital Federal 
rate. The hospital inpatient prospective payment system capital Federal 
rate--
    (A) Is adjusted for the applicable inpatient prospective payment 
system DRG weighting factors.
    (B) Is adjusted for the applicable geographic adjustment factors, 
including local cost variation based on the geographic classifications 
set forth at Sec.  412.64(b)(1)(ii)(A) through (C) and the applicable 
full hospital inpatient prospective payment system wage index value for 
non-reclassified hospitals and, applicable large urban location cost of 
living adjustment factors for LTCHs in Alaska and Hawaii, if 
applicable.
    (C) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    (e) Short-stay outlier payments to long-term care hospitals 
described under Sec.  412.23(e)(2)(ii).
    (1) For discharges occurring on or after October 1, 2002, through 
June 30, 2003, the LTCH prospective payment system adjusted payment 
amount for a short-stay outlier case is the least of the following 
amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section;
    (ii) 120 percent of the estimated cost of the case determined under 
paragraph (d)(2) of this section; or
    (iii) The Federal prospective payment for the LTC-DRG determined 
under paragraph (d)(3) of this section.
    (2) For discharges occurring on or after July 1, 2003, subject to 
the provisions of paragraph (e)(2)(v) of this section, the adjusted 
payment amount for a short-stay outlier is determined under the 
formulas set forth in paragraphs (e)(1)(i) through (iv) of this section 
with the following substitutions:
    (i) For the first year of the transition period, as specified at 
Sec.  412.533(a)(1), the 120 percent specified for the LTC-DRG specific 
per diem amount and the 120 percent of the cost of the case in the 
formula under paragraphs (e)(1)(i) and (e)(1)(ii) of this section are 
substituted with 195 percent.
    (ii) For the second year of the transition period, as specified at 
Sec.  412.533(a)(2), the 120 percent specified for the LTC-DRG specific 
per diem amount and the 120 percent of the cost of the case in the 
formula under paragraphs (e)(1)(i) and (e)(1)(ii) of this section are 
substituted with 193 percent.
    (iii) For the third year of the transition period, as specified at 
Sec.  412.533(a)(3), the 120 percent specified for the LTC-DRG specific 
per diem amount and the 120 percent of the cost of the case in the 
formula under paragraphs (e)(1)(i) and (e)(1)(ii) of this section are 
substituted with 165 percent.
    (iv) For the fourth year of the transition period, as specified at 
Sec.  412.533(a)(4), the 120 percent specified for the LTC-DRG specific 
per diem amount and 120 percent of the cost of the case in the formula 
under paragraphs (e)(1)(i) and (e)(1)(ii) of this section are 
substituted with 136 percent.
    (v) For discharges occurring in cost reporting periods beginning on 
or after October 1, 2006 (beginning with the fifth year of the 
transition period), as specified at Sec.  412.533(a)(5), short-stay 
outlier payments are made based on the least of the following amounts:
    (A) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section;
    (B) 120 percent of the estimated cost of the case determined under 
paragraph (d)(2) of this section; or
    (C) The Federal prospective payment for the LTC-DRG determined 
under paragraph (d)(3) of this section.

0
4. Section 412.531 is amended by--
0
A. Revising paragraph (b)(1)(i)(C).
0
B. Redesignating paragraph (b)(1)(ii)(A)(2) as (b)(1)(ii)(A)(3).
0
C. Adding new paragraph (b)(1)(ii)(A)(2).
    The revisions and additions read as follows:


Sec.  412.531  Special payment provisions when an interruption of a 
stay occurs in a long-term care hospital.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) Surgical DRG exception to the 3-day or less interruption of 
stay policy.
    (1) The number of days that a beneficiary spends away from a long-
term care hospital during a 3-day or less interruption of stay under 
paragraph (a)(1) of this section during which the beneficiary receives 
a procedure grouped to a surgical DRG under the hospital inpatient 
prospective payment system in an acute care hospital during the 2005 
and 2006 LTCH prospective payment system rate years are not included in 
determining the length of stay of the patient at the long-term care 
hospital.
    (2) For discharges occurring on or after July 1 2006, the number of 
days that a beneficiary spends away from a long-term care hospital 
during a 3-day or less interruption of stay under paragraph (a)(1) of 
this section during which the beneficiary receives a procedure grouped 
to a surgical DRG under the hospital inpatient prospective payment 
system in an acute care hospital are included in determining the length 
of stay of the patient at the long-term care hospital.
* * * * *
    (ii) * * *
    (A) * * *
    (2) For discharges occurring on or after July 1, 2006, for a 3-day 
or less interruption of stay under paragraph (a)(1) of this section in 
which a long-term care hospital discharges a patient to an acute care 
hospital and the patient's treatment during the interruption is grouped 
into a surgical DRG under the acute care hospital inpatient prospective 
payment system, the services must be provided under arrangements in 
accordance with Sec.  412.509(c). CMS does not make a separate payment 
to the acute care hospital for the surgical treatment. The LTC-DRG 
payment made to the long-term care hospital is considered payment in 
full as specified in Sec.  412.521(b).
* * * * *

0
5. Section 412.534 is amended by--
0
A. Revising paragraph (c)(1).
0
B. Revising paragraph (c)(2).
0
C. Revising paragraph (d)(1).
0
D. Revising paragraph (e)(1).
0
E. Redesignating paragraph (f) as paragraph (g).

[[Page 27901]]

0
F. Adding new paragraph (f).
    The revisions and addition read as follows:


Sec.  412.534  Special payment provisions for long-term care hospitals 
within hospitals and satellites of long-term care hospitals.

* * * * *
    (c) * * *
    (1) Except as provided in paragraph (g) of this section, for any 
cost reporting period beginning on or after October 1, 2004 in which 
the long-term care hospital or its satellite facility has a discharged 
Medicare inpatient population of whom no more than 25 percent were 
admitted to the hospital or its satellite facility from the co-located 
hospital, payments are made under the rules at Sec.  412.500 through 
Sec.  412.541 in this subpart with no adjustment under this section.
    (2) Except as provided in paragraph (d), (e), or (g) of this 
section, for any cost reporting period beginning on or after October 1, 
2004 in which the long-term care hospital or satellite facility has a 
discharged Medicare inpatient population of whom more than 25 percent 
were admitted to the hospital or satellite facility from the co-located 
hospital, payments for the patients who are admitted from the co-
located hospital and who cause the long-term care hospital or satellite 
facility to exceed the 25 percent threshold for discharged patients who 
have been admitted from the co-located hospital are the lesser of the 
amount otherwise payable under this subpart or the amount payable under 
this subpart that is equivalent, as set forth in paragraph (f) of this 
section, to the amount that would be determined under the rules at 
Subpart A, Sec.  412.1(a). Payments for the remainder of the long-term 
care hospital's or satellite facility's patients are made under the 
rules in this subpart at Sec.  412.500 through Sec.  412.541 with no 
adjustment under this section.
* * * * *
    (d) * * *
    (1) Subject to paragraph (g) of this section, in the case of a 
long-term care hospital or satellite facility that is located in a 
rural area as defined in Sec.  412.64(b)(1)(ii)(C) and is co-located 
with another hospital for any cost reporting period beginning on or 
after October 1, 2004 in which the long-term care hospital or satellite 
facility has a discharged Medicare inpatient population of whom more 
than 50 percent were admitted to the long-term care hospital or 
satellite facility from the co-located hospital, payments for the 
patients who are admitted from the co-located hospital and who cause 
the long-term care hospital or satellite facility to exceed the 50 
percent threshold for discharged patients who were admitted from the 
co-located hospital are the lesser of the amount otherwise payable 
under this subpart or the amount payable under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that were otherwise payable under subpart A, Sec.  412.1(a). 
Payments for the remainder of the long-term care hospital's or 
satellite facility's patients are made under the rules in this subpart 
at Sec.  412.500 through Sec.  412.541 with no adjustment under this 
section.
* * * * *
    (e) * * *
    (1) Subject to paragraph (g) of this section, in the case of a 
long-term care hospital or satellite facility that is co-located with 
the only other hospital in the MSA or with a MSA dominant hospital as 
defined in paragraph (e)(4) of this section, for any cost reporting 
period beginning on or after October 1, 2004 in which the long-term 
care hospital or satellite facility has a discharged Medicare inpatient 
population of whom more than the percentage calculated under paragraph 
(e)(2) of this section were admitted to the hospital from the co-
located hospital, payments for the patients who are admitted from the 
co-located hospital and who cause the long-term care hospital to exceed 
the applicable threshold for discharged patients who have been admitted 
from the co-located hospital are the lesser of the amount otherwise 
payable under this subpart or the amount under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that otherwise would be determined under Subpart A, Sec.  
412.1(a). Payments for the remainder of the long-term care hospital's 
or satellite facility's patients are made under the rules in this 
subpart with no adjustment under this section.
* * * * *
    (f) Calculation of rates. (1) Calculation of LTCH prospective 
payment system amount. CMS calculates an amount payable under subpart O 
equivalent to an amount that would otherwise be paid under the hospital 
inpatient prospective payment system based on the sum of the applicable 
hospital inpatient prospective payment system operating standardized 
amount and capital Federal rate in effect at the time of the LTCH 
discharge.
    (2) Operating inpatient prospective payment system standardized 
amount. The hospital inpatient prospective payment system operating 
standardized amount--
    (i) Is adjusted for the applicable hospital inpatient prospective 
payment system DRG weighting factors;
    (ii) Is adjusted for different area wage levels based on the 
geographic classifications set forth at Sec.  412.64(b)(1)(ii)(A) 
through (C) and the applicable hospital inpatient prospective payment 
system labor-related share, using the applicable hospital inpatient 
prospective payment system wage index value for non-reclassified 
hospitals. For LTCHs located in Alaska and Hawaii, this amount is also 
adjusted by the applicable hospital inpatient prospective payment 
system cost of living adjustment factors;
    (iii) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    (3) Hospital inpatient prospective payment system capital Federal 
rate. The hospital inpatient prospective payment system capital Federal 
rate--
    (i) Is adjusted for the applicable hospital inpatient prospective 
payment system DRG weighting factors;
    (ii) Is adjusted by the applicable geographic adjustment factors, 
including local cost variation based on the applicable geographic 
classifications set forth at Sec.  412.64(b)(1)(ii)(A) through (C) and 
the applicable full hospital inpatient prospective payment system wage 
index value for non-reclassified hospitals, applicable large urban 
location and cost of living adjustment factors for LTCHs for Alaska and 
Hawaii, if applicable;
    (iii) Includes, where applicable, capital inpatient prospective 
payment system adjustments for indirect medical education costs and the 
costs of serving a disproportionate share of low-income patients.
    (4) High cost outlier. An additional payment for high cost outlier 
cases is based on the fixed loss amount established for the hospital 
inpatient prospective payment system.
* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)


[[Page 27902]]


    Dated: April 19, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 1, 2006.
Michael O. Leavitt,
Secretary.

    The following Appendix will not appear in the Code of Federal 
Regulations.

Appendix A--Description of a Preliminary Model of an Update Framework 
under the LTCH PPS

    Section 307(b) of the BIPA requires that the Secretary shall 
examine and may provide for appropriate adjustments to the LTCH PPS, 
including updates. Updates are necessary to appropriately account 
for changes in the prices of goods and services used by a provider 
in furnishing care to patients. A market basket has historically 
been used under the Medicare program in setting update factors for 
services furnished by providers. When we established the LTCH PPS 
for FY 2003 in the August 30, 2002 final rule (67 FR 56030), we 
established under Sec.  412.523(c)(3)(ii) that for FYs after FY 
2003, the LTCH PPS Federal rate was to be the previous year's 
Federal rate updated by the most recent estimate of the LTCH PPS 
market basket. When we moved the date of the annual update of the 
LTCH PPS from October 1 to July 1, beginning with the RY 2004 LTCH 
PPS final rule (68 FR 34138), we revised Sec.  412.523(c)(3)(ii) to 
specify that for LTCH PPS rate years beginning on or after July 1, 
2003, the annual update to the standard Federal rate for the LTCH 
prospective payment system will be equal to the previous rate year's 
Federal rate updated by the most recent estimate of the LTCH PPS 
market basket. (Currently, the LTCH PPS market basket is the FY 
1997-based excluded hospital with capital market basket index (68 FR 
34134 through 34137); however, as discussed in section IV.B. of this 
final rule, we are adopting the FY 2002-based RPL market basket 
under the LTCH PPS beginning in RY 2007.) As we discuss in section 
IV.C.3. of this final rule, based on our analysis of the best 
available LTCH case-mix and margins data, we are revising Sec.  
412.523(c) to specify that for the 2007 LTCH PPS rate year, the 
standard Federal rate from the previous year will be updated by a 
factor of zero percent. However, in the future we may propose to 
develop an update framework to update payments to LTCHs that would 
account for other appropriate factors that affect the efficient 
delivery of services and care provided to Medicare patients. The 
update framework would be proposed in accordance with the notice and 
comment rulemaking process. While we are not implementing a specific 
update framework for the LTCH prospective payment system at this 
time in this final rule, we are repeating below the conceptual basis 
for developing such an update framework that was outlined in the RY 
2007 LTCH PPS proposed rule (71 FR 4742 through 4747) using the 
latest available data.

A. Need for an Update Framework

    Under the LTCH prospective payment system, Medicare payments to 
LTCHs are based on a predetermined national payment amount per 
discharge. Under section 123 of the BBRA and section 307(b) of the 
BIPA, the Secretary has broad discretionary authority to make 
appropriate adjustments to the LTCH payment system, including 
updates to the payment rates. Our goal is to develop a method for 
analyzing and comparing expected trends in the underlying cost per 
discharge to use in establishing these updates. However, as stated 
earlier, until an appropriate update framework is developed, future 
updates may be based on the increase in the applicable LTCH PPS 
market basket.
    The market basket for the LTCH PPS, developed by OACT, 
represents only one component in the measure of growth in LTCHs' 
costs per discharge. It captures only the pure price change of 
inputs (labor, materials, and capital) used by the hospital to 
produce a constant quantity and quality of care. However, other 
factors also contribute to the change in costs per discharge, 
including changes in case-mix, intensity, and productivity.
    Previously, under the acute care hospital IPPS for operating 
costs (the operating IPPS), we utilized an update framework to 
account for these other factors and to make annual recommendations 
to the Congress concerning the magnitude of the update. We continue 
to use a similar framework under the acute care hospital IPPS for 
capital costs (the capital IPPS) to determine the annual update to 
the capital IPPS Federal rate. Based on our experience in developing 
other update frameworks, we are currently examining these factors 
and exploring ways that they could be measured and incorporated into 
an update framework for the LTCH PPS. We are also examining 
additional conceptual and data issues that must be considered when 
the framework is constructed and applied.
    In the August 30, 2002 final rule (67 FR 56087), we pointed out 
that it is important to develop successively more refined models of 
an update framework based on our evaluation of public comments and 
recommendations submitted to us on this issue. We would then further 
study the potential adjustments using the best available data. To 
actively pursue the development of an analytical framework that 
would support the continued appropriateness and relevance of the 
payment rates for services provided to beneficiaries in LTCHs, in 
the RY 2007 LTCH PPS proposed rule, we solicited comments concerning 
the use and feasibility of the conceptual approach outlined in 
section B of this Appendix. Specifically, we requested comments 
concerning which factors are appropriate and should be accounted for 
in the framework, and suggestions concerning potential data sources 
and analysis to support the model. As with the existing methodology 
used under the capital IPPS, the features of a LTCH-specific update 
framework would need to be based on sound policy and methodology. In 
this final rule we are again presenting a conceptual basis for the 
framework along with an illustrative LTCH PPS framework for RY 2007 
based on the latest available data (shown in section E of this 
Appendix). We received two comments on the conceptual basis for the 
framework, which included an illustrative LTCH PPS framework for RY 
2007 that was presented in the RY 2007 LTCH PPS proposed rule. These 
comments are addressed below in section G of this Appendix.

B. Factors Inherent in LTCH Payments Per Discharge

    To understand the factors that determine LTCH costs per 
discharge, it is first necessary to understand the factors that 
determine LTCH payments per discharge. Payments per discharge under 
the LTCH PPS are based on the cost and an implicit normal profit 
margin to the LTCH in providing an efficient level of care. We have 
developed a methodology to identify a mutually exclusive and 
exhaustive set of factors included in LTCH payments per discharge. 
The discussion here details a set of equations to identify these 
factors.
    In its simplest form, the average payment per discharge to a 
LTCH can be separated into a cost term and a profit term as shown in 
Equation 1.
[GRAPHIC] [TIFF OMITTED] TR12MY06.002

    This equation can be made multiplicative by converting profit 
per discharge into a profit rate as shown in Equation 2.
[GRAPHIC] [TIFF OMITTED] TR12MY06.003


[[Page 27903]]


    An output price term can be introduced into the equation by 
multiplying and dividing through by input prices and productivity. 
As shown in Equation 3, the term inside the brackets represents the 
output price, since an output price reflects the input price and 
profit margin adjusted for productivity.
[GRAPHIC] [TIFF OMITTED] TR12MY06.004

    The cost per discharge term can be further separated by 
accounting for real case-mix. Under the LTCH PPS, LTC-DRGs are used 
to classify patients. Based on accurate DRG classification data, 
average real case-mix per discharge can be incorporated, as shown in 
Equation 4.
[GRAPHIC] [TIFF OMITTED] TR12MY06.005

    The term ``real'' is imperative here because only true case-mix 
should be measured, not case-mix caused by improper coding behavior. 
We believe payment should be based on changes in ``real'' case-mix 
(that is, the treatment of more resource intensive and costly 
patients) rather than case mix caused by improper coding behavior or 
changes in coding practice (that is, ``apparent'' case-mix change) 
because ``apparent'' case-mix increase does not result in an 
increase in a hospital's cost of treating those patients. By 
rearranging the terms in Equation 4, a set of mutually exclusive and 
exhaustive factors such as those shown in Equation 5 can be 
identified.
[GRAPHIC] [TIFF OMITTED] TR12MY06.006

    The term in brackets can be analyzed in two steps. First, 
excluding the productivity term results in case-mix adjusted real 
cost per discharge, which is input intensity per discharge. Second, 
multiplying input intensity by productivity results in case-mix 
adjusted real payment per discharge, or output intensity per 
discharge. The rationale behind this step is explained in detail in 
section C.
    The result of this exercise is that LTCH payment per discharge 
can be determined from the following factors as shown in Equation 6.
[GRAPHIC] [TIFF OMITTED] TR12MY06.007

    Thus, it holds that the change in LTCH payment per discharge is 
a function of the change in these factors as shown in Equation 6. In 
order to determine an annual update that most accurately reflects 
the underlying cost to the LTCH of efficiently providing care, the 
four factors related to cost must be accounted for when an update 
framework is developed. A brief discussion of each factor, including 
specific conceptual and data issues, is provided in section C.

C. Defining Each Factor Inherent in LTCH Costs Per Discharge

    Each cost factor from Equation 6 in section B is discussed here 
in detail. Because this is a basic conceptual discussion, it is 
likely that more detailed issues may be relevant that are not 
explored here.

1. Input Prices

    Input prices are the pure prices of inputs used by the LTCH in 
providing services. When we refer to inputs, we are referring to 
costs, which have both a price and a quantity component. The price 
is an input price, and the quantity component reflects real inputs 
or real costs. Similarly, when we refer to outputs, we are referring 
to payments, which also have both a price and a quantity component. 
The price component is the transaction output price, and the 
quantity component is the real output or real payment. The real 
inputs include labor, capital, and other materials, such as drugs. 
By definition, an input price reflects prices that LTCHs encounter 
in purchasing these inputs, whereas an output price reflects the 
prices that buyers encounter in purchasing LTCH services. We 
currently measure input prices using the excluded hospital with 
capital market basket; however, as discussed in section IV.B. of 
this final rule, we are implementing our proposal to adopt the RPL 
market basket, which is based on the operating and capital costs of 
IRFs, IPFs and LTCHs. While not specific to LTCHs, we believe this 
index would adequately reflect the input prices faced by LTCHs.

2. Productivity

    Productivity measures the efficiency of the LTCH in producing 
outputs. It is the amount of real outputs, or real payments that can 
be produced from a given amount of real inputs or real costs. For 
LTCHs, these inputs are in the form of both labor and capital; thus, 
they represent multifactor productivity, as not just labor 
productivity is reflected. Equation 7 shows how multifactor 
productivity can be

[[Page 27904]]

measured in terms of available data, such as payments, costs, and 
input prices:
[GRAPHIC] [TIFF OMITTED] TR12MY06.008

    Rearranging the terms, this multifactor productivity equation 
(Equation 7) was used as the basis for incorporating an output price 
term in Equation 3. This equation is the basis for understanding the 
relationship between input prices, output prices, profit margins, 
and productivity.
    Equation 6 shows that productivity is divided through the 
equation, offsetting other factors. The theory behind this offset is 
that if an efficient LTCH in a competitive market can produce more 
output with the same amount of inputs, the full increase in input 
costs does not have to be passed on by the provider to maintain a 
normal profit margin.

3. Real Case Mix Per Discharge

    Real case mix per discharge is the average overall mix of care 
provided by the LTCH, as measured using the LTC-DRG classification 
system. Over time, a measure of real case-mix will change as care is 
given in more or less complex LTC-DRGs. Changes in the level of care 
within a LTC-DRG classification group would not be reflected in a 
case-mix measure based on LTC-DRGs, but instead should be captured 
in the intensity factor of Equation 6. The important distinction 
here is the difference between real and nominal case-mix. Under the 
LTCH prospective payment system, LTCHs will submit claims using the 
LTC-DRG classification system. The case-mix reflected by the claims 
is considered ``nominal''. However, the reported classification can 
reflect the true level of care provided or improper coding behavior. 
An example of improper coding behavior would be the upcoding, or 
case-mix ``creep'', that took place when the acute care hospital 
IPPS was implemented. (For further details, see ProPAC's March 1, 
1994 Report and Recommendations to Congress (pp. 73-74).) Any change 
in case-mix that is not associated with the actual level of care or 
a true change in the level of care provided must be excluded in 
order to determine real case-mix.

4. Case-Mix Constant Real Output Intensity Per Discharge

    Intensity is the true underlying nature of the product or 
service and can take the form of output or input intensity, or both. 
In the case of LTCHs, output intensity per discharge is associated 
with real payment per discharge, while input intensity per discharge 
is associated with real cost per discharge. For example, input 
intensity would be associated with a nurse's hours when providing 
treatment, whereas output intensity would be associated with the 
type and number of treatments a nurse provides. The underlying 
nature of LTCH services is determined by factors such as 
technological capabilities, increased utilization of inputs (such as 
labor or drugs), site of care, and practice patterns. Because these 
factors can be difficult to measure, intensity per discharge is 
usually calculated as a residual after the other factors from 
Equation 6 were accounted for.
    Accounting for output intensity associated with an efficient 
LTCH can be more accurately analyzed using a LTCH's costs rather 
than its payments. This analysis would also provide an alternative 
to developing or using a transaction output price index. Equation 8 
shows how to use the definition of an output price as defined 
earlier to convert the equation for output intensity per discharge 
to reflect costs instead of payments, as used in Equation 6.
[GRAPHIC] [TIFF OMITTED] TR12MY06.009

    The last equation in Equation 8 is identical to the term in 
brackets in Equation 5, case-mix constant real input intensity per 
discharge multiplied by productivity. Thus, output intensity per 
discharge can be defined in such a way that cost data from the LTCH 
are utilized. This equation can be broken down even further to 
account for different types of input intensity per discharge. We 
discuss this matter more fully in section D.

D. Applying the Factors That Affect LTCH Costs Per Discharge in an 
Update Framework

    As discussed earlier, payments per discharge under the LTCH PPS 
have been updated annually since the LTCH PPS was implemented for 
cost-reporting periods beginning on or after October 1, 2002. Under 
this final rule, the standard Federal rate from the previous year 
will be updated by a factor of zero percent based on our analysis of 
LTCH margins and case-mix using the best available data. The 
development of an update framework with a sound conceptual basis 
provides the capability to understand the underlying trends in LTCH 
costs per discharge for an efficient provider.
    Previously we identified factors inherent in LTCH costs per 
discharge. Changes in these factors determine the change in LTCH 
costs per discharge and fitting these factors into an appropriate 
framework would allow us to accurately reflect changes in the 
underlying costs for efficient LTCHs. The following explanation 
accounts for each of these factors from Equation 6 under the LTCH 
PPS:

[[Page 27905]]

     Change in case-mix constant real output intensity per 
discharge would be accounted for in the update framework, reflecting 
the factors that affect not only case-mix constant real input 
intensity per discharge, but also productivity, which is determined 
separately. Factors that can cause changes in case-mix constant real 
input intensity per discharge include, but are not limited to, 
changes in site of service, changes in within-LTC-DRG case-mix, 
changes in practice patterns, changes in the use of inputs, and 
changes in technology available.
     Changes in nominal case-mix are automatically included 
in the payment to the LTCH. Therefore, the update framework should 
include an adjustment to convert changes in nominal case-mix per 
discharge to changes in real case-mix per discharge, if they are 
different.
     Change in multifactor productivity would be accounted 
for in the update framework. The availability of historical data on 
input prices, payments, and costs are useful in the analysis of this 
factor.
     Changes in input prices for labor, material, and 
capital would be accounted for in the update framework using an 
input price index, or market basket. To assist in updating payments 
for LTCH services, OACT currently has developed an input price 
index; this is currently the excluded hospital with capital market 
basket, and we are finalizing our proposal to adopt the RPL market 
basket under the LTCH PPS as discussed in section IV.B. of the 
preamble of this final rule.
     In an update framework, a forecast error adjustment 
would be included to reflect that the updates are set prospectively 
and a forecast error for a given year should not be perpetuated in 
payments for future years. In the case of the acute care hospital 
IPPS, this prospective adjustment is made on a 2-year lag and only 
if the error exceeds a defined threshold (0.25 percentage points).

E. Illustrative LTCH Prospective Payment System Update Framework for 
the 2007 LTCH PPS Rate Year

    Table 20 shows an illustrative update framework for the LTCH PPS 
for RY 2007 based on the latest available data. Some of the factors 
in the LTCH framework are computed using Medicare cost report data, 
while others are determined based on policy considerations. This is 
consistent with the factors in the capital IPPS update framework. 
This design for a LTCH update framework is for illustrative purposes 
only, as much more work needs to be done to determine the 
appropriate level of detail for each factor.
    MedPAC supported this for updating payments and applied a 
similar framework when it proposed updates to hospital payments in 
its annual Report to Congress (MedPAC, 2000). The appropriateness of 
this framework for updating hospital payments was also discussed in 
the article, ``Are PPS Payments Adequate? Issues for Updating and 
Assessing Rates'' (Health Care Financing Review, Winter 1992). We 
believe a similar framework would be useful for analyzing updates to 
LTCH payments.
    If we applied this update framework to determine the LTCH PPS 
standard Federal rate for RY 2007, the update factor for RY 2007 
would be -0.6 percent. This estimate is based on the best available 
data at this time. The estimated update factor is based on a 
projected 3.4 percent increase in the RPL market basket, a 0.0 
adjustment for intensity, a -0.9 percent adjustment for 
productivity, a -4.0 percent adjustment for case-mix, and a forecast 
error correction of 0.9 percent. The following is a description of 
the policy adjustments that have been applied under the illustrative 
LTCH PPS update framework for RY 2007.
    The CMI is the measure of the average DRG weight for cases paid 
under the LTCH PPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the 
CMI corresponds to an equal percentage increase in hospital 
payments.
    The CMI can change for any of several reasons:
     Changes in the average resource use of Medicare 
patients ( real case-mix change);
     Changes in hospital coding of patient records resulting 
in higher weight DRG assignments (``apparent'' CMI).
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
coding behavior that result in assignment of cases to higher 
weighted DRGs but do not reflect higher resource requirements.
    As discussed in section IV.C.3. of the preamble of this final 
rule, for RY 2007, we are estimating a 6.75 percent nominal increase 
in the CMI. We estimate that the real case-mix increase would equal 
2.75 percent in RY 2007. The net adjustment for change in case-mix 
is the difference between the projected increase in real case-mix 
and the projected nominal increase in real case-mix. Therefore, the 
estimated adjustment for case-mix change would be -4.0 percentage 
points (2.75 percent minus 6.75 percent).
    The framework also contains an adjustment for forecast error. 
The market basket forecast is based on historical trends and 
relationships ascertainable at the time the update factor is 
established for the upcoming year. In any given year, there may be 
unanticipated price fluctuations that may result in differences 
between the actual increases in prices and the forecast used in 
calculating the update factors. There is a 2-year lag between the 
forecast and the measurement of the forecast error. A forecast error 
of 0.9 percentage points was calculated for the RY 2005 update. That 
is, current historical data indicate that the forecasted RY 2005 
market basket (3.1 percent) understated the actual realized price 
increases (4.0 percent) by 0.9 percentage points. Therefore, a 0.9 
percent adjustment would be appropriate to account for the forecast 
error under the illustrative LTCH PPS update framework for RY 2007.
    Under this framework, we also make an adjustment for 
productivity, an efficiency measure. Productivity measures the 
ability of hospitals to reduce the quantity of inputs required to 
produce a unit of service while maintaining quality. MedPAC has 
recommended a productivity target based on the Bureau of Labor 
Statistics' estimate of the 10-year moving national average rate of 
productivity growth. The productivity target currently equals 0.9 
percent. This target is lower than the productivity estimate 
calculated using the latest available LTCH cost report data. 
Therefore, under the illustrative LTCH PPS update framework for RY 
2007, we would recommend a 0.9 percent adjustment for productivity.
    We also make an adjustment for changes in intensity. The 
intensity factor reflects how hospital services are utilized to 
produce the final product, that is, the discharge. This component 
accounts for changes in these types of factors, such as the use of 
quality-enhancing services, for changes in within-DRG severity, and 
for expected modification of practice patterns to remove non-cost 
effective services. Based on the latest available LTCH data, we 
calculated a negative intensity factor. As we have done in the past 
under the IPPS when we have found that case-mix consistent intensity 
is declining, we believe that it would be appropriate to apply a 
zero intensity adjustment under the illustrative LTCH PPS update 
framework for RY 2007 (August 1, 2000, 65 FR 47119).
    Table 20 illustrates what a possible LTCH PPS update framework 
would be if we proposed to determine the annual update to the LTCH 
PPS Federal rate based on a framework model such as this for RY 
2007. This conceptual model of a LTCH PPS update framework is for 
illustrative purposes only. As we discuss in greater detail in 
section IV.C.3. of the preamble of this final rule, we are 
establishing a zero percent update to the LTCH PPS standard Federal 
rate for RY 2007.

     Table A-1.--Illustrative LTCH PPS Update Framework for RY 2007
------------------------------------------------------------------------
                         Factors                          Percent change
------------------------------------------------------------------------
Price (+):..............................................             4.3
    Proposed RPL Market Basket..........................             3.4
    Forecast Error......................................             0.9
Productivity(-).........................................             0.9
Output Intensity (+):...................................             0.0
    Input Intensity.....................................            -0.9
    Productivity........................................             0.9
Case-mix Creep Adjustment (+):..........................            -4.0
    Nominal Case-Mix....................................           -6.75
    Real Case-Mix.......................................            2.75
Other factors (+).......................................             0.0
                                                         ---------------
    Total...............................................            -0.6
------------------------------------------------------------------------

F. Additional Conceptual and Data Issues

    Additional conceptual issues specific to the LTCH PPS include 
the relevance of a site-of-service substitution adjustment, the 
necessity of an adjustment for LTC-DRG reclassification, the 
handling of one-time factors, and consistency with other types of 
hospital updates since LTCHs are similar in structure to these other 
types of hospitals.
    Under the acute care hospital IPPS, a site-of-service 
substitution factor (captured as part of intensity) was necessary 
because of

[[Page 27906]]

the incentive to shift care from the inpatient hospital to other 
settings such as hospital outpatient departments, SNFs, or HHAs. For 
the LTCH PPS, it is not clear without additional research whether 
there is an incentive to shift care either into or out of the LTCH 
because of the changes in behavior created by the different Medicare 
payment systems.
    A reclassification and recalibration adjustment under the acute 
care hospital IPPS is necessary to account for changes in the case-
mix or the types of patients treated by hospitals resulting from the 
annual reclassification and recalibration of the DRGs. This 
adjustment for case-mix is applied to the current FY update, but 
reflects the effect of revisions in the FY that is 2 years before 
that fiscal year. Whether a LTC-DRG reclassification adjustment 
would be necessary in the update framework would depend on the data 
availability and the likelihood of revisions to LTC-DRG 
classifications on a periodic basis.
    There is also a question about how to handle one-time factors 
(an example of these could be the increased costs of converting 
computer systems to Year 2000 compliance). An update framework might 
be an appropriate mechanism to account for these items, but because 
of uncertainty surrounding their impact on costs, determining an 
appropriate adjustment amount may be difficult.
    LTCHs are heterogeneous and are designated as a separate payment 
category only because their patients have longer average lengths of 
stay. This raises the question of whether certain factors in an 
update framework for LTCHs should be consistent with the factors in 
an update framework for other types of hospitals since they face 
similar cost pressures. Additional research in this area would need 
to be conducted to determine the reasonableness of having consistent 
updates.
    The purpose of this conceptual discussion is not to determine 
how the identified factors of the update framework would be 
measured. We recognize that there are significant measurement issues 
in accurately determining the factors that would account for growth 
in costs per discharge for efficiently providing care. This is 
driven, in part, by the shift from a cost-based payment system with 
an upper payment limit to a PPS. Significant research and data 
collection would be necessary to accurately measure these factors 
over the historical period. One example of this would be to measure 
the distinction between real and nominal case-mix change. However, 
many of these same concerns were also encountered and successfully 
addressed in the hospital IPPS update framework.
    The discussion here provides the conceptual basis for developing 
an update framework for the LTCH PPS that reflects changes in the 
underlying costs of efficiently providing services. It is important 
to note that the framework would not handle distribution issues such 
as geographic wage variations. Due to some variations in technical 
methodologies for measuring the factors of an update framework, and 
because of some of the data concerns mentioned earlier, implementing 
an update framework for the LTCH PPS would involve making 
significant policy decisions on issues similar to those made for the 
hospital IPPS update framework.

G. Summary of Public Comments and CMS Responses

    Comment: One commenter stated that given the complexity of the 
conceptual ideas put forth for updating the LTCH payments and the 
limited time afforded to comment on the entire proposed rule, CMS 
should extend the time frame to which it will accept comments 
regarding the update framework. Commenters also recommended that CMS 
further refine the update framework with input from the industry.
    Response: We note that in accordance with section 1871 of the 
Act, we provided for a 60-day comment period, which closed at 5 p.m. 
on March 20, 2006, for the public to provide comments on the 
proposed policy changes and clarifications presented in the RY 2007 
LTCH PPS proposed rule (71 FR 4648). Moreover, we reiterate that we 
are not implementing a specific update framework for determining the 
RY 2007 Federal rate under the LTCH PPS at this time. As we stated 
in the RY 2007 LTCH PPS proposed rule, we intend for the development 
of such an update framework to be a process that evolves after 
evaluating input from the industry. Therefore, we are open to 
working with the public to refine the data sources and formulas used 
to determine the values of the individual components of such a 
framework that would be proposed, in the future, to update the 
standard Federal rate. Therefore, as noted previously in the 
Appendix, we continue to solicit comments to assist us in refining 
the data sources and methods that would be used to implement such a 
framework under the LTCH PPS. Any future proposal to develop an 
update framework would be proposed in accordance with the notice and 
comment rulemaking process.
    Comment: One commenter was concerned that some inputs into this 
``new market basket methodology'' (that is, the conceptual model of 
an update framework) appear to be subjective and at the discretion 
of CMS. The commenter believes that the market basket update should 
be calculated using objective, reliable, and verifiable mathematical 
concepts and publicly available data, rather than using ``policy 
considerations'' and other subjective variables.
    Response: We would like to clarify that this is not a ``new 
market basket methodology,'' but instead a way to determine an 
appropriate payment update. The market basket is only one factor of 
a complex update framework. We support the public's involvement in 
helping us refine the data sources and methods that could be used to 
implement an update framework. While it is our preference to use 
``verifiable mathematical concepts and publicly available data,'' 
there may be instances in which such data is unavailable. Therefore, 
there will be a need to utilize policy considerations and other 
subjective information in determining a proposed update framework. 
We believe it would be inappropriate to implement the framework 
without having all of the factors reflected.
    The following addendum will not appear in the Code of Federal 
Regulations.

Addendum

    This addendum contains the tables referred to throughout the 
preamble to this final rule. The tables presented below are as 
follows:
Table 1: Long-Term Care Hospital Wage Index for Urban Areas for 
Discharges Occurring from July 1, 2006 through June 30, 2007
Table 2: Long-Term Care Hospital Wage Index for Rural Areas for 
Discharges Occurring from July 1, 2006 through June 30, 2007
Table 3: FY 2006 LTC-DRG Relative Weights, Geometric Average Length 
of Stay and five-sixths of the Geometric Average Length of Stay (for 
Short-Stay Outlier Cases) for Discharges Occurring on or after 
October 1, 2005 through September 30, 2006. (Note: This is the same 
information provided in Table 11 of the FY 2006 IPPS final rule (70 
FR 47681 through 47690), which has been reprinted here for 
convenience.)

    Table 1.--Long-Term Care Hospital Wage Index for Urban Areas for
     Discharges Occurring From July 1, 2006 Through June 30, 2007\1\
 
------------------------------------------------------------------------
                        Urban area         \3/5\      \4/5\       Full
    CBSA code          (constituent         wage       wage       wage
                        counties)         index\2\   index\3\   index\4\
------------------------------------------------------------------------
10180...........  Abilene, TX..........     0.8738     0.8317     0.7896
                   Callahan County, TX.
                   Jones County, TX....
                   Taylor County, TX...
10380...........  Aguadilla-Isabela-San     0.6843     0.5790     0.4738
                   Sebasti[aacute], PR.
                   Aguada Municipio, PR
                   Aguadilla Municipio,
                   PR.

[[Page 27907]]

 
                   A[ntilde]asco
                   Municipio, PR.
                   Isabela Municipio,
                   PR.
                   Lares Municipio, PR.
                   Moca Municipio, PR..
                   Rinc[oacute]n
                   Municipio, PR.
                   San Sebasti[aacute]
                   Municipio, PR.
10420...........  Akron, OH............     0.9389     0.9186     0.8982
                   Portage County, OH..
                   Summit County, OH...
10500...........  Albany, GA...........     0.9177     0.8902     0.8628
                   Baker County, GA....
                   Dougherty County, GA
                   Lee County, GA......
                   Terrell County, GA..
                   Worth County, GA....
10580...........  Albany-Schenectady-       0.9153     0.8871     0.8589
                   Troy, NY.
                   Albany County, NY...
                   Rensselaer County,
                   NY.
                   Saratoga County, NY.
                   Schenectady County,
                   NY.
                   Schoharie County, NY
10740...........  Albuquerque, NM......     0.9810     0.9747     0.9684
                   Bernalillo County,
                   NM.
                   Sandoval County, NM.
                   Torrance County, NM.
                   Valencia County, NM.
10780...........  Alexandria, LA.......     0.8820     0.8426     0.8033
                   Grant Parish, LA....
                   Rapides Parish, LA..
10900...........  Allentown-Bethlehem-      0.9891     0.9854     0.9818
                   Easton, PA-NJ.
                   Warren County, NJ...
                   Carbon County, PA...
                   Lehigh County, PA...
                   Northampton County,
                   PA.
11020...........  Altoona, PA..........     0.9366     0.9155     0.8944
                   Blair County, PA....
11100...........  Amarillo, TX.........     0.9494     0.9325     0.9156
                   Armstrong County, TX
                   Carson County, TX...
                   Potter County, TX...
                   Randall County, TX..
11180...........  Ames, IA.............     0.9722     0.9629     0.9536
                   Story County, IA....
11260...........  Anchorage, AK........     1.1137     1.1516     1.1895
                   Anchorage
                   Municipality, AK.
                   Matanuska-Susitna
                   Borough, AK.
11300...........  Anderson, IN.........     0.9152     0.8869     0.8586
                   Madison County, IN..
11340...........  Anderson, SC.........     0.9398     0.9198     0.8997
                   Anderson County, SC.
11460...........  Ann Arbor, MI........     1.0515     1.0687     1.0859
                   Washtenaw County, MI
11500...........  Anniston-Oxford, AL..     0.8609     0.8146     0.7682
                   Calhoun County, AL..
11540...........  Appleton, WI.........     0.9573     0.9430     0.9288
                   Calumet County, WI..
                   Outagamie County, WI
11700...........  Asheville, NC........     0.9571     0.9428     0.9285
                   Buncombe County, NC.
                   Haywood County, NC..
                   Henderson County, NC
                   Madison County, NC..
12020...........  Athens-Clarke County,     0.9913     0.9884     0.9855
                   GA.
                   Clarke County, GA...
                   Madison County, GA..
                   Oconee County, GA...
                   Oglethorpe County,
                   GA.
12060...........  Atlanta-Sandy Springs-    0.9876     0.9834     0.9793
                   Marietta, GA.

[[Page 27908]]

 
                   Barrow County, GA...
                   Bartow County, GA...
                   Butts County, GA....
                   Carroll County, GA..
                   Cherokee County, GA.
                   Clayton County, GA..
                   Cobb County, GA.....
                   Coweta County, GA...
                   Dawson County, GA...
                   DeKalb County, GA...
                   Douglas County, GA..
                   Fayette County, GA..
                   Forsyth County, GA..
                   Fulton County, GA...
                   Gwinnett County, GA.
                   Haralson County, GA.
                   Heard County, GA....
                   Henry County, GA....
                   Jasper County, GA...
                   Lamar County, GA....
                   Meriwether County,
                   GA.
                   Newton County, GA...
                   Paulding County, GA.
                   Pickens County, GA..
                   Pike County, GA.....
                   Rockdale County, GA.
                   Spalding County, GA.
                   Walton County, GA...
12100...........  Atlantic City, NJ....     1.0969     1.1292     1.1615
                   Atlantic County, NJ.
12220...........  Auburn-Opelika, AL...     0.8860     0.8480     0.8100
                   Lee County, AL......
12260...........  Augusta-Richmond          0.9849     0.9798     0.9748
                   County, GA-SC.
                   Burke County, GA....
                   Columbia County, GA.
                   McDuffie County, GA.
                   Richmond County, GA.
                   Aiken County, SC....
                   Edgefield County, SC
12420...........  Austin-Round Rock, TX     0.9662     0.9550     0.9437
                   Bastrop County, TX..
                   Caldwell County, TX.
                   Hays County, TX.....
                   Travis County, TX...
                   Williamson County,
                   TX.
12540...........  Bakersfield, CA......     1.0282     1.0376     1.0470
                   Kern County, CA.....
12580...........  Baltimore-Towson, MD.     0.9938     0.9918     0.9897
                   Anne Arundel County,
                   MD.
                   Baltimore County, MD
                   Carroll County, MD..
                   Harford County, MD..
                   Howard County, MD...
                   Queen Anne's County,
                   MD.
                   Baltimore City, MD..
12620...........  Bangor, ME...........     0.9996     0.9994     0.9993
                   Penobscot County, ME
12700...........  Barnstable Town, MA..     1.1560     1.2080     1.2600
                   Barnstable County,
                   MA.
12940...........  Baton Rouge, LA......     0.9156     0.8874     0.8593
                   Ascension Parish, LA
                   East Baton Rouge
                   Parish, LA.
                   East Feliciana
                   Parish, LA.
                   Iberville Parish, LA
                   Livingston Parish,
                   LA.
                   Pointe Coupee
                   Parish, LA.
                   St. Helena Parish,
                   LA.
                   West Baton Rouge
                   Parish, LA.

[[Page 27909]]

 
                   West Feliciana
                   Parish, LA.
12980...........  Battle Creek, MI.....     0.9705     0.9606     0.9508
                   Calhoun County, MI..
13020...........  Bay City, MI.........     0.9606     0.9474     0.9343
                   Bay County, MI......
13140...........  Beaumont-Port Arthur,     0.9047     0.8730     0.8412
                   TX.
                   Hardin County, TX...
                   Jefferson County, TX
                   Orange County, TX...
13380...........  Bellingham, WA.......     1.1039     1.1385     1.1731
                   Whatcom County, WA..
13460...........  Bend, OR.............     1.0472     1.0629     1.0786
                   Deschutes County, OR
13644...........  Bethesda-Gaithersburg-    1.0890     1.1186     1.1483
                   Frederick, MD.
                   Frederick County, MD
                   Montgomery County,
                   MD.
13740...........  Billings, MT.........     0.9300     0.9067     0.8834
                   Carbon County, MT...
                   Yellowstone County,
                   MT.
13780...........  Binghamton, NY.......     0.9137     0.8850     0.8562
                   Broome County, NY...
                   Tioga County, NY....
13820...........  Birmingham-Hoover, AL     0.9375     0.9167     0.8959
                   Bibb County, AL.....
                   Blount County, AL...
                   Chilton County, AL..
                   Jefferson County, AL
                   St. Clair County, AL
                   Shelby County, AL...
                   Walker County, AL...
13900...........  Bismarck, ND.........     0.8544     0.8059     0.7574
                   Burleigh County, ND.
                   Morton County, ND...
13980...........  Blacksburg-               0.8772     0.8363     0.7954
                   Christiansburg-
                   Radford, VA.
                   Giles County, VA....
                   Montgomery County,
                   VA.
                   Pulaski County, VA..
                   Radford City, VA....
14020...........  Bloomington, IN......     0.9068     0.8758     0.8447
                   Greene County, IN...
                   Monroe County, IN...
                   Owen County, IN.....
14060...........  Bloomington-Normal,       0.9445     0.9260     0.9075
                   IL.
                   McLean County, IL...
14260...........  Boise City-Nampa, ID.     0.9431     0.9242     0.9052
                   Ada County, ID......
                   Boise County, ID....
                   Canyon County, ID...
                   Gem County, ID......
                   Owyhee County, ID...
14484...........  Boston-Quincy, MA....     1.0935     1.1246     1.1558
                   Norfolk County, MA..
                   Plymouth County, MA.
                   Suffolk County, MA..
14500...........  Boulder, CO..........     0.9840     0.9787     0.9734
                   Boulder County, CO..
14540...........  Bowling Green, KY....     0.8927     0.8569     0.8211
                   Edmonson County, KY.
                   Warren County, KY...
14740...........  Bremerton-Silverdale,     1.0405     1.0540     1.0675
                   WA.
                   Kitsap County, WA...
14860...........  Bridgeport-Stamford-      1.1555     1.2074     1.2592
                   Norwalk, CT.
                   Fairfield County, CT
15180...........  Brownsville-              0.9882     0.9843     0.9804
                   Harlingen, TX.
                   Cameron County, TX..
15260...........  Brunswick, GA........     0.9587     0.9449     0.9311
                   Brantley County, GA.
                   Glynn County, GA....

[[Page 27910]]

 
                   McIntosh County, GA.
15380...........  Buffalo-Niagara           0.9707     0.9609     0.9511
                   Falls, NY.
                   Erie County, NY.....
                   Niagara County, NY..
15500...........  Burlington, NC.......     0.9343     0.9124     0.8905
                   Alamance County, NC.
15540...........  Burlington-South          0.9646     0.9528     0.9410
                   Burlington, VT.
                   Chittenden County,
                   VT.
                   Franklin County, VT.
                   Grand Isle County,
                   VT.
15764...........  Cambridge-Newton-         1.0703     1.0938     1.1172
                   Framingham, MA.
                   Middlesex County, MA
15804...........  Camden, NJ...........     1.0310     1.0414     1.0517
                   Burlington County,
                   NJ.
                   Camden County, NJ...
                   Gloucester County,
                   NJ.
15940...........  Canton-Massillon, OH.     0.9361     0.9148     0.8935
                   Carroll County, OH..
                   Stark County, OH....
15980...........  Cape Coral-Fort           0.9614     0.9485     0.9356
                   Myers, FL.
                   Lee County, FL......
16180...........  Carson City, NV......     1.0140     1.0187     1.0234
                   Carson City, NV.....
16220...........  Casper, WY...........     0.9416     0.9221     0.9026
                   Natrona County, WY..
16300...........  Cedar Rapids, IA.....     0.9295     0.9060     0.8825
                   Benton County, IA...
                   Jones County, IA....
                   Linn County, IA.....
16580...........  Champaign-Urbana, IL.     0.9756     0.9675     0.9594
                   Champaign County, IL
                   Ford County, IL.....
                   Piatt County, IL....
16620...........  Charleston, WV.......     0.9067     0.8756     0.8445
                   Boone County, WV....
                   Clay County, WV.....
                   Kanawha County, WV..
                   Lincoln County, WV..
                   Putnam County, WV...
16700...........  Charleston-North          0.9547     0.9396     0.9245
                   Charleston, SC.
                   Berkeley County, SC.
                   Charleston County,
                   SC.
                   Dorchester County,
                   SC.
16740...........  Charlotte-Gastonia-       0.9850     0.9800     0.9750
                   Concord, NC-SC.
                   Anson County, NC....
                   Cabarrus County, NC.
                   Gaston County, NC...
                   Mecklenburg County,
                   NC.
                   Union County, NC....
                   York County, SC.....
16820...........  Charlottesville, VA..     1.0112     1.0150     1.0187
                   Albemarle County, VA
                   Fluvanna County, VA.
                   Greene County, VA...
                   Nelson County, VA...
                   Charlottesville
                   City, VA.
16860...........  Chattanooga, TN-GA...     0.9453     0.9270     0.9088
                   Catoosa County, GA..
                   Dade County, GA.....
                   Walker County, GA...
                   Hamilton County, TN.
                   Marion County, TN...
                   Sequatchie County,
                   TN.
16940...........  Cheyenne, WY.........     0.9265     0.9020     0.8775
                   Laramie County, WY..
16974...........  Chicago-Naperville-       1.0474     1.0632     1.0790
                   Joliet, IL.
                   Cook County, IL.....
                   DeKalb County, IL...

[[Page 27911]]

 
                   DuPage County, IL...
                   Grundy County, IL...
                   Kane County, IL.....
                   Kendall County, IL..
                   McHenry County, IL..
                   Will County, IL.....
17020...........  Chico, CA............     1.0307     1.0409     1.0511
                   Butte County, CA....
17140...........  Cincinnati-               0.9769     0.9692     0.9615
                   Middletown, OH-KY-IN.
                   Dearborn County, IN.
                   Franklin County, IN.
                   Ohio County, IN.....
                   Boone County, KY....
                   Bracken County, KY..
                   Campbell County, KY.
                   Gallatin County, KY.
                   Grant County, KY....
                   Kenton County, KY...
                   Pendleton County, KY
                   Brown County, OH....
                   Butler County, OH...
                   Clermont County, OH.
                   Hamilton County, OH.
                   Warren County, OH...
17300...........  Clarksville, TN-KY...     0.8970     0.8627     0.8284
                   Christian County, KY
                   Trigg County, KY....
                   Montgomery County,
                   TN.
                   Stewart County, TN..
17420...........  Cleveland, TN........     0.8883     0.8511     0.8139
                   Bradley County, TN..
                   Polk County, TN.....
17460...........  Cleveland-Elyria-         0.9528     0.9370     0.9213
                   Mentor, OH.
                   Cuyahoga County, OH.
                   Geauga County, OH...
                   Lake County, OH.....
                   Lorain County, OH...
                   Medina County, OH...
17660...........  Coeur d'Alene, ID....     0.9788     0.9718     0.9647
                   Kootenai County, ID.
17780...........  College Station-          0.9340     0.9120     0.8900
                   Bryan, TX.
                   Brazos County, TX...
                   Burleson County, TX.
                   Robertson County, TX
17820...........  Colorado Springs, CO.     0.9681     0.9574     0.9468
                   El Paso County, CO..
                   Teller County, CO...
17860...........  Columbia, MO.........     0.9007     0.8676     0.8345
                   Boone County, MO....
                   Howard County, MO...
17900...........  Columbia, SC.........     0.9434     0.9246     0.9057
                   Calhoun County, SC..
                   Fairfield County, SC
                   Kershaw County, SC..
                   Lexington County, SC
                   Richland County, SC.
                   Saluda County, SC...
17980...........  Columbus, GA-AL......     0.9136     0.8848     0.8560
                   Russell County, AL..
                   Chattahoochee
                   County, GA.
                   Harris County, GA...
                   Marion County, GA...
                   Muscogee County, GA.
18020...........  Columbus, IN.........     0.9753     0.9670     0.9588
                   Bartholomew County,
                   IN.
18140...........  Columbus, OH.........     0.9916     0.9888     0.9860
                   Delaware County, OH.
                   Fairfield County, OH

[[Page 27912]]

 
                   Franklin County, OH.
                   Licking County, OH..
                   Madison County, OH..
                   Morrow County, OH...
                   Pickaway County, OH.
                   Union County, OH....
18580...........  Corpus Christi, TX...     0.9130     0.8840     0.8550
                   Aransas County, TX..
                   Nueces County, TX...
                   San Patricio County,
                   TX.
18700...........  Corvallis, OR........     1.0437     1.0583     1.0729
                   Benton County, OR...
19060...........  Cumberland, MD-WV....     0.9590     0.9454     0.9317
                   Allegany County, MD.
                   Mineral County, WV..
19124...........  Dallas-Plano-Irving,      1.0137     1.0182     1.0228
                   TX.
                   Collin County, TX...
                   Dallas County, TX...
                   Delta County, TX....
                   Denton County, TX...
                   Ellis County, TX....
                   Hunt County, TX.....
                   Kaufman County, TX..
                   Rockwall County, TX.
19140...........  Dalton, GA...........     0.9447     0.9263     0.9079
                   Murray County, GA...
                   Whitfield County, GA
19180...........  Danville, IL.........     0.9417     0.9222     0.9028
                   Vermilion County, IL
19260...........  Danville, VA.........     0.9093     0.8791     0.8489
                   Pittsylvania County,
                   VA.
                   Danville City, VA...
19340...........  Davenport-Moline-Rock     0.9234     0.8979     0.8724
                   Island, IA-IL.
                   Henry County, IL....
                   Mercer County, IL...
                   Rock Island County,
                   IL.
                   Scott County, IA....
19380...........  Dayton, OH...........     0.9438     0.9251     0.9064
                   Greene County, OH...
                   Miami County, OH....
                   Montgomery County,
                   OH.
                   Preble County, OH...
19460...........  Decatur, AL..........     0.9081     0.8775     0.8469
                   Lawrence County, AL.
                   Morgan County, AL...
19500...........  Decatur, IL..........     0.8840     0.8454     0.8067
                   Macon County, IL....
19660...........  Deltona-Daytona Beach-    0.9579     0.9439     0.9299
                   Ormond Beach, FL.
                   Volusia County, FL..
19740...........  Denver-Aurora, CO....     1.0434     1.0578     1.0723
                   Adams County, CO....
                   Arapahoe County, CO.
                   Broomfield County,
                   CO.
                   Clear Creek County,
                   CO.
                   Denver County, CO...
                   Douglas County, CO..
                   Elbert County, CO...
                   Gilpin County, CO...
                   Jefferson County, CO
                   Park County, CO.....
19780...........  Des Moines,-West Des      0.9801     0.9735     0.9669
                   Moines, IA.
                   Dallas County, IA...
                   Guthrie County, IA..
                   Madison County, IA..
                   Polk County, IA.....
                   Warren County, IA...
19804...........  Detroit-Livonia-          1.0254     1.0339     1.0424
                   Dearborn, MI.
                   Wayne County, MI....

[[Page 27913]]

 
20020...........  Dothan, AL...........     0.8633     0.8177     0.7721
                   Geneva County, AL...
                   Henry County, AL....
                   Houston County, AL..
20100...........  Dover, DE............     0.9866     0.9821     0.9776
                   Kent County, DE.....
20220...........  Dubuque, IA..........     0.9414     0.9219     0.9024
                   Dubuque County, IA..
20260...........  Duluth, MN-WI........     1.0128     1.0170     1.0213
                   Carlton County, MN..
                   St. Louis County, MN
                   Douglas County, WI..
20500...........  Durham, NC...........     1.0146     1.0195     1.0244
                   Chatham County, NC..
                   Durham County, NC...
                   Orange County, NC...
                   Person County, NC...
20740...........  Eau Claire, WI.......     0.9521     0.9361     0.9201
                   Chippewa County, WI.
                   Eau Claire County,
                   WI.
20764...........  Edison, NJ...........     1.0749     1.0999     1.1249
                   Middlesex County, NJ
                   Monmouth County, NJ.
                   Ocean County, NJ....
                   Somerset County, NJ.
20940...........  El Centro, CA........     0.9344     0.9125     0.8906
                   Imperial County, CA.
21060...........  Elizabethtown, KY....     0.9281     0.9042     0.8802
                   Hardin County, KY...
                   Larue County, KY....
21140...........  Elkhart-Goshen, IN...     0.9776     0.9702     0.9627
                   Elkhart County, IN..
21300...........  Elmira, NY...........     0.8950     0.8600     0.8250
                   Chemung County, NY..
21340...........  El Paso, TX..........     0.9386     0.9182     0.8977
                   El Paso County, TX..
21500...........  Erie, PA.............     0.9242     0.8990     0.8737
                   Erie County, PA.....
21604...........  Essex County, MA.....     1.0323     1.0430     1.0538
                   Essex County, MA....
21660...........  Eugene-Springfield,       1.0491     1.0654     1.0818
                   OR.
                   Lane County, OR.....
21780...........  Evansville, IN-KY....     0.9228     0.8970     0.8713
                   Gibson County, IN...
                   Posey County, IN....
                   Vanderburgh County,
                   IN.
                   Warrick County, IN..
                   Henderson County, KY
                   Webster County, KY..
21820...........  Fairbanks, AK........     1.0845     1.1126     1.1408
                   Fairbanks North Star
                   Borough, AK.
21940...........  Fajardo, PR..........     0.6492     0.5322     0.4153
                   Ceiba Municipio, PR.
                   Fajardo Municipio,
                   PR.
                   Luquillo Municipio,
                   PR.
22020...........  Fargo, ND-MN.........     0.9092     0.8789     0.8486
                   Cass County, ND.....
                   Clay County, MN.....
22140...........  Farmington, NM.......     0.9105     0.8807     0.8509
                   San Juan County, NM.
22180...........  Fayetteville, NC.....     0.9650     0.9533     0.9416
                   Cumberland County,
                   NC.
                   Hoke County, NC.....
22220...........  Fayetteville-             0.9197     0.8929     0.8661
                   Springdale-Rogers,
                   AR-MO.
                   Benton County, AR...
                   Madison County, AR..
                   Washington County,
                   AR.
                   McDonald County, MO.

[[Page 27914]]

 
22380...........  Flagstaff, AZ........     1.1255     1.1674     1.2092
                   Coconino County, AZ.
22420...........  Flint, MI............     1.0393     1.0524     1.0655
                   Genesee County, MI..
22500...........  Florence, SC.........     0.9368     0.9158     0.8947
                   Darlington County,
                   SC.
                   Florence County, SC.
22520...........  Florence-Muscle           0.8963     0.8618     0.8272
                   Shoals, AL.
                   Colbert County, AL..
                   Lauderdale County,
                   AL.
22540...........  Fond du Lac, WI......     0.9784     0.9712     0.9640
                   Fond du Lac County,
                   WI.
22660...........  Fort Collins-             1.0073     1.0098     1.0122
                   Loveland, CO.
                   Larimer County, CO..
22744...........  Fort Lauderdale-          1.0259     1.0346     1.0432
                   Pompano Beach-
                   Deerfield Beach, FL.
                   Broward County, FL..
22900...........  Fort Smith, AR-OK....     0.8938     0.8584     0.8230
                   Crawford County, AR.
                   Franklin County, AR.
                   Sebastian County, AR
                   Le Flore County, OK.
                   Sequoyah County, OK.
23020...........  Fort Walton Beach-        0.9323     0.9098     0.8872
                   Crestview-Destin, FL.
                   Okaloosa County, FL.
23060...........  Fort Wayne, IN.......     0.9876     0.9834     0.9793
                   Allen County, IN....
                   Wells County, IN....
                   Whitley County, IN..
23104...........  Fort Worth-Arlington,     0.9692     0.9589     0.9486
                   TX.
                   Johnson County, TX..
                   Parker County, TX...
                   Tarrant County, TX..
                   Wise County, TX.....
23420...........  Fresno, CA...........     1.0323     1.0430     1.0538
                   Fresno County, CA...
23460...........  Gadsden, AL..........     0.8763     0.8350     0.7938
                   Etowah County, AL...
23540...........  Gainesville, FL......     0.9633     0.9510     0.9388
                   Alachua County, FL..
                   Gilchrist County, FL
23580...........  Gainesville, GA......     0.9324     0.9099     0.8874
                   Hall County, GA.....
23844...........  Gary, IN.............     0.9637     0.9516     0.9395
                   Jasper County, IN...
                   Lake County, IN.....
                   Newton County, IN...
                   Porter County, IN...
24020...........  Glens Falls, NY......     0.9135     0.8847     0.8559
                   Warren County, NY...
                   Washington County,
                   NY.
24140...........  Goldsboro, NC........     0.9265     0.9020     0.8775
                   Wayne County, NC....
24220...........  Grand Forks, ND-MN...     0.8741     0.8321     0.7901
                   Polk County, MN.....
                   Grand Forks County,
                   ND.
24300...........  Grand Junction, CO...     0.9730     0.9640     0.9550
                   Mesa County, CO.....
24340...........  Grand Rapids-Wyoming,     0.9634     0.9512     0.9390
                   MI.
                   Barry County, MI....
                   Ionia County, MI....
                   Kent County, MI.....
                   Newaygo County, MI..
24500...........  Great Falls, MT......     0.9431     0.9242     0.9052
                   Cascade County, MT..
24540...........  Greeley, CO..........     0.9742     0.9656     0.9570
                   Weld County, CO.....
24580...........  Green Bay, WI........     0.9690     0.9586     0.9483
                   Brown County, WI....

[[Page 27915]]

 
                   Kewaunee County, WI.
                   Oconto County, WI...
24660...........  Greensboro-High           0.9462     0.9283     0.9104
                   Point, NC.
                   Guilford County, NC.
                   Randolph County, NC.
                   Rockingham County,
                   NC.
24780...........  Greenville, NC.......     0.9655     0.9540     0.9425
                   Greene County, NC...
                   Pitt County, NC.....
24860...........  Greenville, SC.......     1.0016     1.0022     1.0027
                   Greenville County,
                   SC.
                   Laurens County, SC..
                   Pickens County, SC..
25020...........  Guayama, PR..........     0.5909     0.4545     0.3181
                   Arroyo Municipio, PR
                   Guayama Municipio,
                   PR.
                   Patillas Municipio,
                   PR.
25060...........  Gulfport-Biloxi, MS..     0.9357     0.9143     0.8929
                   Hancock County, MS..
                   Harrison County, MS.
                   Stone County, MS....
25180...........  Hagerstown-               0.9693     0.9591     0.9489
                   Martinsburg, MD-WV.
                   Washington County,
                   MD.
                   Berkeley County, WV.
                   Morgan County, WV...
25260...........  Hanford-Corcoran, CA.     1.0022     1.0029     1.0036
                   Kings County, CA....
25420...........  Harrisburg-Carlisle,      0.9588     0.9450     0.9313
                   PA.
                   Cumberland County,
                   PA.
                   Dauphin County, PA..
                   Perry County, PA....
25500...........  Harrisonburg, VA.....     0.9453     0.9270     0.9088
                   Rockingham County,
                   VA.
                   Harrisonburg City,
                   VA.
25540...........  Hartford-West             1.0644     1.0858     1.1073
                   Hartford-East
                   Hartford, CT.
                   Hartford County, CT.
                   Litchfield County,
                   CT.
                   Middlesex County, CT
                   Tolland County, CT..
25620...........  Hattiesburg, MS......     0.8561     0.8081     0.7601
                   Forrest County, MS..
                   Lamar County, MS....
                   Perry County, MS....
25860...........  Hickory-Lenoir-           0.9353     0.9137     0.8921
                   Morganton, NC.
                   Alexander County, NC
                   Burke County, NC....
                   Caldwell County, NC.
                   Catawba County, NC..
25980...........  Hinesville-Fort           0.8597     0.8130     0.7662
                   Stewart, GA.
                   Liberty County, GA..
                   Long County, GA.....
26100...........  Holland-Grand Haven,      0.9433     0.9244     0.9055
                   MI.
                   Ottawa County, MI...
26180...........  Honolulu, HI.........     1.0728     1.0971     1.1214
                   Honolulu County, HI.
26300...........  Hot Springs, AR......     0.9403     0.9204     0.9005
                   Garland County, AR..
26380...........  Houma-Bayou Cane-         0.8736     0.8315     0.7894
                   Thibodaux, LA.
                   Lafourche Parish, LA
                   Terrebonne Parish,
                   LA.
26420...........  Houston-Sugar Land-       0.9998     0.9997     0.9996
                   Baytown, TX.
                   Austin County, TX...
                   Brazoria County, TX.
                   Chambers County, TX.
                   Fort Bend County, TX
                   Galveston County, TX
                   Harris County, TX...
                   Liberty County, TX..

[[Page 27916]]

 
                   Montgomery County,
                   TX.
                   San Jacinto County,
                   TX.
                   Waller County, TX...
26580...........  Huntington-Ashland,       0.9686     0.9582     0.9477
                   WV-KY-OH.
                   Boyd County, KY.....
                   Greenup County, KY..
                   Lawrence County, OH.
                   Cabell County, WV...
                   Wayne County, WV....
26620...........  Huntsville, AL.......     0.9488     0.9317     0.9146
                   Limestone County, AL
                   Madison County, AL..
26820...........  Idaho Falls, ID......     0.9652     0.9536     0.9420
                   Bonneville County,
                   ID.
                   Jefferson County, ID
26900...........  Indianapolis-Carmel,      0.9952     0.9936     0.9920
                   IN.
                   Boone County, IN....
                   Brown County, IN....
                   Hamilton County, IN.
                   Hancock County, IN..
                   Hendricks County, IN
                   Johnson County, IN..
                   Marion County, IN...
                   Morgan County, IN...
                   Putnam County, IN...
                   Shelby County, IN...
26980...........  Iowa City, IA........     0.9848     0.9798     0.9747
                   Johnson County, IA..
                   Washington County,
                   IA.
27060...........  Ithaca, NY...........     0.9876     0.9834     0.9793
                   Tompkins County, NY.
27100...........  Jackson, MI..........     0.9582     0.9443     0.9304
                   Jackson County, MI..
27140...........  Jackson, MS..........     0.8987     0.8649     0.8311
                   Copiah County, MS...
                   Hinds County, MS....
                   Madison County, MS..
                   Rankin County, MS...
                   Simpson County, MS..
27180...........  Jackson, TN..........     0.9378     0.9171     0.8964
                   Chester County, TN..
                   Madison County, TN..
27260...........  Jacksonville, FL.....     0.9574     0.9432     0.9290
                   Baker County, FL....
                   Clay County, FL.....
                   Duval County, FL....
                   Nassau County, FL...
                   St. Johns County, FL
27340...........  Jacksonville, NC.....     0.8942     0.8589     0.8236
                   Onslow County, NC...
27500...........  Janesville, WI.......     0.9723     0.9630     0.9538
                   Rock County, WI.....
27620...........  Jefferson City, MO...     0.9032     0.8710     0.8387
                   Callaway County, MO.
                   Cole County, MO.....
                   Moniteau County, MO.
                   Osage County, MO....
27740...........  Johnson City, TN.....     0.8762     0.8350     0.7937
                   Carter County, TN...
                   Unicoi County, TN...
                   Washington County,
                   TN.
27780...........  Johnstown, PA........     0.9012     0.8683     0.8354
                   Cambria County, PA..
27860...........  Jonesboro, AR........     0.8747     0.8329     0.7911
                   Craighead County, AR
                   Poinsett County, AR.
27900...........  Joplin, MO...........     0.9149     0.8866     0.8582
                   Jasper County, MO...

[[Page 27917]]

 
                   Newton County, MO...
28020...........  Kalamazoo-Portage, MI     1.0229     1.0305     1.0381
                   Kalamazoo County, MI
                   Van Buren County, MI
28100...........  Kankakee-Bradley, IL.     1.0433     1.0577     1.0721
                   Kankakee County, IL.
28140...........  Kansas City, MO-KS...     0.9686     0.9581     0.9476
                   Franklin County, KS.
                   Johnson County, KS..
                   Leavenworth County,
                   KS.
                   Linn County, KS.....
                   Miami County, KS....
                   Wyandotte County, KS
                   Bates County, MO....
                   Caldwell County, MO.
                   Cass County, MO.....
                   Clay County, MO.....
                   Clinton County, MO..
                   Jackson County, MO..
                   Lafayette County, MO
                   Platte County, MO...
                   Ray County, MO......
28420...........  Kennewick-Richland-       1.0371     1.0495     1.0619
                   Pasco, WA.
                   Benton County, WA...
                   Franklin County, WA.
28660...........  Killeen-Temple-Fort       0.9116     0.8821     0.8526
                   Hood, TX.
                   Bell County, TX.....
                   Coryell County, TX..
                   Lampasas County, TX.
28700...........  Kingsport-Bristol-        0.8832     0.8443     0.8054
                   Bristol, TN-VA.
                   Hawkins County, TN..
                   Sullivan County, TN.
                   Bristol City, VA....
                   Scott County, VA....
                   Washington County,
                   VA.
28740...........  Kingston, NY.........     0.9553     0.9404     0.9255
                   Ulster County, NY...
28940...........  Knoxville, TN........     0.9065     0.8753     0.8441
                   Anderson County, TN.
                   Blount County, TN...
                   Knox County, TN.....
                   Loudon County, TN...
                   Union County, TN....
29020...........  Kokomo, IN...........     0.9705     0.9606     0.9508
                   Howard County, IN...
                   Tipton County, IN...
29100...........  La Crosse, WI-MN.....     0.9738     0.9651     0.9564
                   Houston County, MN..
                   La Crosse County, WI
29140...........  Lafayette, IN........     0.9242     0.8989     0.8736
                   Benton County, IN...
                   Carroll County, IN..
                   Tippecanoe County,
                   IN.
29180...........  Lafayette, LA........     0.9057     0.8742     0.8428
                   Lafayette Parish, LA
                   St. Martin Parish,
                   LA.
29340...........  Lake Charles, LA.....     0.8700     0.8266     0.7833
                   Calcasieu Parish, LA
                   Cameron Parish, LA..
29404...........  Lake County-Kenosha       1.0257     1.0343     1.0429
                   County, IL-WI.
                   Lake County, IL.....
                   Kenosha County, WI..
29460...........  Lakeland, FL.........     0.9347     0.9130     0.8912
                   Polk County, FL.....
29540...........  Lancaster, PA........     0.9816     0.9755     0.9694
                   Lancaster County, PA
29620...........  Lansing-East Lansing,     0.9876     0.9835     0.9794
                   MI.
                   Clinton County, MI..

[[Page 27918]]

 
                   Eaton County, MI....
                   Ingham County, MI...
29700...........  Laredo, TX...........     0.8841     0.8454     0.8068
                   Webb County, TX.....
29740...........  Las Cruces, NM.......     0.9080     0.8774     0.8467
                   Dona Ana County, NM.
29820...........  Las Vegas-Paradise,       1.0862     1.1150     1.1437
                   NV.
                   Clark County, NV....
29940...........  Lawrence, KS.........     0.9122     0.8830     0.8537
                   Douglas County, KS..
30020...........  Lawton, OK...........     0.8723     0.8298     0.7872
                   Comanche County, OK.
30140...........  Lebanon, PA..........     0.9075     0.8767     0.8459
                   Lebanon County, PA..
30300...........  Lewiston, ID-WA......     0.9932     0.9909     0.9886
                   Nez Perce County, ID
                   Asotin County, WA...
30340...........  Lewiston-Auburn, ME..     0.9599     0.9465     0.9331
                   Androscoggin County,
                   ME.
30460...........  Lexington-Fayette, KY     0.9445     0.9260     0.9075
                   Bourbon County, KY..
                   Clark County, KY....
                   Fayette County, KY..
                   Jessamine County, KY
                   Scott County, KY....
                   Woodford County, KY.
30620...........  Lima, OH.............     0.9535     0.9380     0.9225
                   Allen County, OH....
30700...........  Lincoln, NE1.0128....     1.0171     1.0214
                   Lancaster County, NE
                   Seward County, NE...
30780...........  Little Rock-North         0.9248     0.8998     0.8747
                   Little Rock, AR.
                   Faulkner County, AR.
                   Grant County, AR....
                   Lonoke County, AR...
                   Perry County, AR....
                   Pulaski County, AR..
                   Saline County, AR...
30860...........  Logan, UT-ID.........     0.9498     0.9331     0.9164
                   Franklin County, ID.
                   Cache County, UT....
30980...........  Longview, TX.........     0.9238     0.8984     0.8730
                   Gregg County, TX....
                   Rusk County, TX.....
                   Upshur County, TX...
31020...........  Longview, WA.........     0.9747     0.9663     0.9579
                   Cowlitz County, WA..
31084...........  Los Angeles-Long          1.1070     1.1426     1.1783
                   Beach-Glendale, CA.
                   Los Angeles County,
                   CA.
31140...........  Louisville-Jefferson      0.9551     0.9401     0.9251
                   County, KY-IN.
                   Clark County, IN....
                   Floyd County, IN....
                   Harrison County, IN.
                   Washington County,
                   IN.
                   Bullitt County, KY..
                   Henry County, KY....
                   Jefferson County, KY
                   Meade County, KY....
                   Nelson County, KY...
                   Oldham County, KY...
                   Shelby County, KY...
                   Spencer County, KY..
                   Trimble County, KY..
31180...........  Lubbock, TX..........     0.9270     0.9026     0.8783
                   Crosby County, TX...
                   Lubbock County, TX..
31340...........  Lynchburg, VA........     0.9215     0.8953     0.8691
                   Amherst County, VA..

[[Page 27919]]

 
                   Appomattox County,
                   VA.
                   Bedford County, VA..
                   Campbell County, VA.
                   Bedford City, VA....
                   Lynchburg City, VA..
31420...........  Macon, GA............     0.9666     0.9554     0.9443
                   Bibb County, GA.....
                   Crawford County, GA.
                   Jones County, GA....
                   Monroe County, GA...
                   Twiggs County, GA...
31460...........  Madera, CA...........     0.9228     0.8970     0.8713
                   Madera County, CA...
31540...........  Madison, WI..........     1.0395     1.0527     1.0659
                   Columbia County, WI.
                   Dane County, WI.....
                   Iowa County, WI.....
31700...........  Manchester-Nashua, NH     1.0212     1.0283     1.0354
                   Hillsborough County,
                   NH.
                   Merrimack County, NH
31900...........  Mansfield, OH........     0.9935     0.9913     0.9891
                   Richland County, OH.
32420...........  Mayag[uuml]ez, PR....     0.6412     0.5216     0.4020
                   Hormigueros
                   Municipio, PR.
                   Mayag[uuml]ez
                   Municipio, PR.
32580...........  McAllen-Edinburg-         0.9360     0.9147     0.8934
                   Mission, TX.
                   Hidalgo County, TX..
32780...........  Medford, OR..........     1.0135     1.0180     1.0225
                   Jackson County, OR..
32820...........  Memphis, TN-MS-AR....     0.9638     0.9518     0.9397
                   Crittenden County,
                   AR.
                   DeSoto County, MS...
                   Marshall County, MS.
                   Tate County, MS.....
                   Tunica County, MS...
                   Fayette County, TN..
                   Shelby County, TN...
                   Tipton County, TN...
32900...........  Merced, CA...........     1.0665     1.0887     1.1109
                   Merced County, CA...
33124...........  Miami-Miami Beach-        0.9850     0.9800     0.9750
                   Kendall, FL.
                   Miami-Dade County,
                   FL.
33140...........  Michigan City-La          0.9639     0.9519     0.9399
                   Porte, IN.
                   LaPorte County, IN..
33260...........  Midland, TX..........     0.9708     0.9611     0.9514
                   Midland County, TX..
33340...........  Milwaukee-Waukesha-       1.0088     1.0117     1.0146
                   West Allis, WI.
                   Milwaukee County, WI
                   Ozaukee County, WI..
                   Washington County,
                   WI.
                   Waukesha County, WI.
33460...........  Minneapolis-St. Paul-     1.0645     1.0860     1.1075
                   Bloomington, MN-WI.
                   Anoka County, MN....
                   Carver County, MN...
                   Chisago County, MN..
                   Dakota County, MN...
                   Hennepin County, MN.
                   Isanti County, MN...
                   Ramsey County, MN...
                   Scott County, MN....
                   Sherburne County, MN
                   Washington County,
                   MN.
                   Wright County, MN...
                   Pierce County, WI...
                   St. Croix County, WI
33540...........  Missoula, MT.........     0.9684     0.9578     0.9473
                   Missoula County, MT.
33660...........  Mobile, AL...........     0.8735     0.8313     0.7891

[[Page 27920]]

 
                   Mobile County, AL...
33700...........  Modesto, CA..........     1.1131     1.1508     1.1885
                   Stanislaus County,
                   CA.
33740...........  Monroe, LA...........     0.8819     0.8425     0.8031
                   Ouachita Parish, LA.
                   Union Parish, LA....
33780...........  Monroe, MI...........     0.9681     0.9574     0.9468
                   Monroe County, MI...
33860...........  Montgomery, AL.......     0.9171     0.8894     0.8618
                   Autauga County, AL..
                   Elmore County, AL...
                   Lowndes County, AL..
                   Montgomery County,
                   AL.
34060...........  Morgantown, WV.......     0.9052     0.8736     0.8420
                   Monongalia County,
                   WV.
                   Preston County, WV..
34100...........  Morristown, TN.......     0.8777     0.8369     0.7961
                   Grainger County, TN.
                   Hamblen County, TN..
                   Jefferson County, TN
34580...........  Mount Vernon-             1.0272     1.0363     1.0454
                   Anacortes, WA.
                   Skagit County, WA...
34620...........  Muncie, IN...........     0.9358     0.9144     0.8930
                   Delaware County, IN.
34740...........  Muskegon-Norton           0.9798     0.9731     0.9664
                   Shores, MI.
                   Muskegon County, MI.
34820...........  Myrtle Beach-Conway-      0.9360     0.9147     0.8934
                   North Myrtle Beach,
                   SC.
                   Horry County, SC         1.1586     1.2114     1.2643
                   34900 Napa, CA.
                   Napa County, CA.....
34940...........  Naples-Marco Island,      1.0083     1.0111     1.0139
                   FL.
                   Collier County, FL..
34980...........  Nashville-Davidson--      0.9874     0.9832     0.9790
                   Murfreesboro, TN.
                   Cannon County, TN...
                   Cheatham County, TN.
                   Davidson County, TN.
                   Dickson County, TN..
                   Hickman County, TN..
                   Macon County, TN....
                   Robertson County, TN
                   Rutherford County,
                   TN.
                   Smith County, TN....
                   Sumner County, TN...
                   Trousdale County, TN
                   Williamson County,
                   TN.
                   Wilson County, TN...
35004...........  Nassau-Suffolk, NY...     1.1631     1.2175     1.2719
                   Nassau County, NY...
                   Suffolk County, NY..
35084...........  Newark-Union, NJ-PA..     1.1130     1.1506     1.1883
                   Essex County, NJ....
                   Hunterdon County, NJ
                   Morris County, NJ...
                   Sussex County, NJ...
                   Union County, NJ....
                   Pike County, PA.....
35300...........  New Haven-Milford, CT     1.1132     1.1510     1.1887
                   New Haven County, CT
35380...........  New Orleans-Metairie-     0.9397     0.9196     0.8995
                   Kenner, LA.
                   Jefferson Parish, LA
                   Orleans Parish, LA..
                   Plaquemines Parish,
                   LA.
                   St. Bernard Parish,
                   LA.
                   St. Charles Parish,
                   LA.
                   St. John the Baptist
                   Parish, LA.
                   St. Tammany Parish,
                   LA.
35644...........  New York-White Plains-    1.1913     1.2550     1.3188
                   Wayne, NY-NJ.
                   Bergen County, NJ...
                   Hudson County, NJ...

[[Page 27921]]

 
                   Passaic County, NJ..
                   Bronx County, NY....
                   Kings County, NY....
                   New York County, NY.
                   Putnam County, NY...
                   Queens County, NY...
                   Richmond County, NY.
                   Rockland County, NY.
                   Westchester County,
                   NY.
35660...........  Niles-Benton Harbor,      0.9327     0.9103     0.8879
                   MI.
                   Berrien County, MI..
35980...........  Norwich-New London,       1.0807     1.1076     1.1345
                   CT.
                   New London County,
                   CT.
36084...........  Oakland-Fremont-          1.3208     1.4277     1.5346
                   Hayward, CA.
                   Alameda County, CA..
                   Contra Costa County,
                   CA.
36100...........  Ocala, FL............     0.9355     0.9140     0.8925
                   Marion County, FL...
36140...........  Ocean City, NJ.......     1.0607     1.0809     1.1011
                   Cape May County, NJ.
36220...........  Odessa, TX...........     0.9930     0.9907     0.9884
                   Ector County, TX....
36260...........  Ogden-Clearfield, UT.     0.9417     0.9223     0.9029
                   Davis County, UT....
                   Morgan County, UT...
                   Weber County, UT....
36420...........  Oklahoma City, OK....     0.9419     0.9225     0.9031
                   Canadian County, OK.
                   Cleveland County, OK
                   Grady County, OK....
                   Lincoln County, OK..
                   Logan County, OK....
                   McClain County, OK..
                   Oklahoma County, OK.
36500...........  Olympia, WA..........     1.0556     1.0742     1.0927
                   Thurston County, WA.
36540...........  Omaha-Council Bluffs,     0.9736     0.9648     0.9560
                   NE-IA.
                   Harrison County, IA.
                   Mills County, IA....
                   Pottawattamie
                   County, IA.
                   Cass County, NE.....
                   Douglas County, NE..
                   Sarpy County, NE....
                   Saunders County, NE.
                   Washington County,
                   NE.
36740...........  Orlando-Kissimmee, FL     0.9678     0.9571     0.9464
                   Lake County, FL.....
                   Orange County, FL...
                   Osceola County, FL..
                   Seminole County, FL.
36780...........  Oshkosh-Neenah, WI...     0.9510     0.9346     0.9183
                   Winnebago County, WI
36980...........  Owensboro, KY........     0.9268     0.9024     0.8780
                   Daviess County, KY..
                   Hancock County, KY..
                   McLean County, KY...
37100...........  Oxnard-Thousand Oaks-     1.0973     1.1298     1.1622
                   Ventura, CA.
                   Ventura County, CA..
37340...........  Palm Bay-Melbourne-       0.9903     0.9871     0.9839
                   Titusville, FL.
                   Brevard County, FL..
37460...........  Panama City-Lynn          0.8803     0.8404     0.8005
                   Haven, FL.
                   Bay County, FL......
37620...........  Parkersburg-Marietta-     0.8962     0.8616     0.8270
                   Vienna, WV-OH.
                   Washington County,
                   OH.
                   Pleasants County, WV
                   Wirt County, WV.....
                   Wood County, WV.....
37700...........  Pascagoula, MS.......     0.8894     0.8525     0.8156

[[Page 27922]]

 
                   George County, MS...
                   Jackson County, MS..
37860...........  Pensacola-Ferry Pass-     0.8858     0.8477     0.8096
                   Brent, FL.
                   Escambia County, FL.
                   Santa Rosa County,
                   FL.
37900...........  Peoria, IL...........     0.9322     0.9096     0.8870
                   Marshall County, IL.
                   Peoria County, IL...
                   Stark County, IL....
                   Tazewell County, IL.
                   Woodford County, IL.
37964...........  Philadelphia, PA.....     1.0623     1.0830     1.1038
                   Bucks County, PA....
                   Chester County, PA..
                   Delaware County, PA.
                   Montgomery County,
                   PA.
                   Philadelphia County,
                   PA.
38060...........  Phoenix-Mesa-             1.0076     1.0102     1.0127
                   Scottsdale, AZ.
                   Maricopa County, AZ.
                   Pinal County, AZ....
38220...........  Pine Bluff, AR.......     0.9208     0.8944     0.8680
                   Cleveland County, AR
                   Jefferson County, AR
                   Lincoln County, AR..
38300...........  Pittsburgh, PA.......     0.9307     0.9076     0.8845
                   Allegheny County, PA
                   Armstrong County, PA
                   Beaver County, PA...
                   Butler County, PA...
                   Fayette County, PA..
                   Washington County,
                   PA.
                   Westmoreland County,
                   PA.
38340...........  Pittsfield, MA.......     1.0109     1.0145     1.0181
                   Berkshire County, MA
38540...........  Pocatello, ID........     0.9611     0.9481     0.9351
                   Bannock County, ID..
                   Power County, ID....
38660...........  Ponce, PR............     0.6963     0.5951     0.4939
                   Juana D[iacute]az
                   Municipio, PR.
                   Ponce Municipio, PR.
                   Villalba Municipio,
                   PR.
38860...........  Portland-South            1.0229     1.0306     1.0382
                   Portland-Biddeford,
                   ME.
                   Cumberland County,
                   ME.
                   Sagadahoc County, ME
                   York County, ME.....
38900...........  Portland-Vancouver-       1.0760     1.1013     1.1266
                   Beaverton, OR-WA.
                   Clackamas County, OR
                   Columbia County, OR.
                   Multnomah County, OR
                   Washington County,
                   OR.
                   Yamhill County, OR..
                   Clark County, WA....
                   Skamania County, WA.
38940...........  Port St. Lucie-Fort       1.0074     1.0098     1.0123
                   Pierce, FL.
                   Martin County, FL...
                   St. Lucie County, FL
39100...........  Poughkeepsie-Newburgh-    1.0535     1.0713  1.0891 NY
                   Middletown,.
                   Dutchess County, NY.
                   Orange County, NY...
39140...........  Prescott, AZ.........     0.9921     0.9895     0.9869
                   Yavapai County, AZ..
39300...........  Providence-New            1.0580     1.0773     1.0966
                   Bedford-Fall River,
                   RI-MA.
                   Bristol County, MA..
                   Bristol County, RI..
                   Kent County, RI.....
                   Newport County, RI..
                   Providence County,
                   RI.

[[Page 27923]]

 
                   Washington County,
                   RI.
39340...........  Provo-Orem, UT.......     0.9700     0.9600     0.9500
                   Juab County, UT.....
                   Utah County, UT.....
39380...........  Pueblo, CO...........     0.9174     0.8898     0.8623
                   Pueblo County, CO...
39460...........  Punta Gorda, FL......     0.9553     0.9404     0.9255
                   Charlotte County, FL
39540...........  Racine, WI...........     0.9398     0.9198     0.8997
                   Racine County, WI...
39580...........  Raleigh-Cary, NC.....     0.9815     0.9753     0.9691
                   Franklin County, NC.
                   Johnston County, NC.
                   Wake County, NC.....
39660...........  Rapid City, SD.......     0.9392     0.9190     0.8987
                   Meade County, SD....
                   Pennington County,
                   SD.
39740...........  Reading, PA..........     0.9812     0.9749     0.9686
                   Berks County, PA....
39820...........  Redding, CA..........     1.1322     1.1762     1.2203
                   Shasta County, CA...
39900...........  Reno-Sparks, NV......     1.0589     1.0786     1.0982
                   Storey County, NV...
                   Washoe County, NV...
40060...........  Richmond, VA.........     0.9597     0.9462     0.9328
                   Amelia County, VA...
                   Caroline County, VA.
                   Charles City County,
                   VA.
                   Chesterfield County,
                   VA.
                   Cumberland County,
                   VA.
                   Dinwiddie County, VA
                   Goochland County, VA
                   Hanover County, VA..
                   Henrico County, VA..
                   King and Queen
                   County, VA.
                   King William County,
                   VA.
                   Louisa County, VA...
                   New Kent County, VA.
                   Powhatan County, VA.
                   Prince George
                   County, VA.
                   Sussex County, VA...
                   Colonial Heights
                   City, VA.
                   Hopewell City, VA...
                   Petersburg City, VA.
                   Richmond City, VA...
40140...........  Riverside-San             1.0616     1.0822     1.1027
                   Bernardino-Ontario,
                   CA.
                   Riverside County, CA
                   San Bernardino
                   County, CA.
40220...........  Roanoke, VA..........     0.9024     0.8699     0.8374
                   Botetourt County, VA
                   Craig County, VA....
                   Franklin County, VA.
                   Roanoke County, VA..
                   Roanoke City, VA....
                   Salem City, VA......
40340...........  Rochester, MN........     1.0679     1.0905     1.1131
                   Dodge County, MN....
                   Olmsted County, MN..
                   Wabasha County, MN..
40380...........  Rochester, NY........     0.9473     0.9297     0.9121
                   Livingston County,
                   NY.
                   Monroe County, NY...
                   Ontario County, NY..
                   Orleans County, NY..
                   Wayne County, NY....
40420...........  Rockford, IL.........     0.9990     0.9987     0.9984
                   Boone County, IL....
                   Winnebago County, IL

[[Page 27924]]

 
40484...........  Rockingham County-        1.0224     1.0299     1.0374
                   Strafford County, NH.
                   Rockingham County,
                   NH.
                   Strafford County, NH
40580...........  Rocky Mount, NC......     0.9349     0.9132     0.8915
                   Edgecombe County, NC
                   Nash County, NC.....
40660...........  Rome, GA.............     0.9648     0.9531     0.9414
                   Floyd County, GA....
40900...........  Sacramento--Arden-        1.1781     1.2375     1.2969
                   Arcade--Roseville,
                   CA.
                   El Dorado County, CA
                   Placer County, CA...
                   Sacramento County,
                   CA.
                   Yolo County, CA.....
40980...........  Saginaw-Saginaw           0.9453     0.9270     0.9088
                   Township North, MI.
                   Saginaw County, MI..
41060...........  St. Cloud, MN........     0.9979     0.9972     0.9965
                   Benton County, MN...
                   Stearns County, MN..
41100...........  St. George, UT.......     0.9635     0.9514     0.9392
                   Washington County,
                   UT.
41140...........  St. Joseph, MO-KS....     0.9711     0.9615     0.9519
                   Doniphan County, KS.
                   Andrew County, MO...
                   Buchanan County, MO.
                   DeKalb County, MO...
41180...........  St. Louis, MO-IL.....     0.9372     0.9163     0.8954
                   Bond County, IL.....
                   Calhoun County, IL..
                   Clinton County, IL..
                   Jersey County, IL...
                   Macoupin County, IL.
                   Madison County, IL..
                   Monroe County, IL...
                   St. Clair County, IL
                   Crawford County, MO.
                   Franklin County, MO.
                   Jefferson County, MO
                   Lincoln County, MO..
                   St. Charles County,
                   MO.
                   St. Louis County, MO
                   Warren County, MO...
                   Washington County,
                   MO.
                   St. Louis City, MO..
41420...........  Salem, OR............     1.0265     1.0354     1.0442
                   Marion County, OR...
                   Polk County, OR.....
41500...........  Salinas, CA..........     1.2477     1.3302     1.4128
                   Monterey County, CA.
41540...........  Salisbury, MD........     0.9438     0.9251     0.9064
                   Somerset County, MD.
                   Wicomico County, MD.
41620...........  Salt Lake City, UT...     0.9653     0.9537     0.9421
                   Salt Lake County, UT
                   Summit County, UT...
                   Tooele County, UT...
41660...........  San Angelo, TX.......     0.8963     0.8617     0.8271
                   Irion County, TX....
                   Tom Green County, TX
41700...........  San Antonio, TX......     0.9388     0.9184     0.8980
                   Atascosa County, TX.
                   Bandera County, TX..
                   Bexar County, TX....
                   Comal County, TX....
                   Guadalupe County, TX
                   Kendall County, TX..
                   Medina County, TX...
                   Wilson County, TX...
41740...........  San Diego-Carlsbad-       1.0848     1.1130     1.1413
                   San Marcos, CA.

[[Page 27925]]

 
                   San Diego County, CA
41780...........  Sandusky, OH.........     0.9411     0.9215     0.9019
                   Erie County, OH.....
41884...........  San Francisco-San         1.2996     1.3995     1.4994
                   Mateo-Redwood City,
                   CA.
                   Marin County, CA....
                   San Francisco
                   County, CA.
                   San Mateo County, CA
41900...........  San Germ[aacute]n-        0.6790     0.5720     0.4650
                   Cabo Rojo, PR.
                   Cabo Rojo Municipio,
                   PR.
                   Lajas Municipio, PR.
                   Sabana Grande
                   Municipio, PR.
                   San Germ[aacute]n
                   Municipio, PR.
41940...........  San Jose-Sunnyvale-       1.3059     1.4079     1.5099
                   Santa Clara, CA.
                   San Benito County,
                   CA.
                   Santa Clara County,
                   CA.
41980...........  San Juan-Caguas-          0.6773     0.5697     0.4621
                   Guaynabo, PR.
                   Aguas Buenas
                   Municipio, PR.
                   Aibonito Municipio,
                   PR.
                   Arecibo Municipio,
                   PR.
                   Barceloneta
                   Municipio, PR.
                   Barranquitas
                   Municipio, PR.
                   Bayam[oacute]n
                   Municipio, PR.
                   Caguas Municipio, PR
                   Camuy Municipio, PR.
                   Can[oacute]vanas
                   Municipio, PR.
                   Carolina Municipio,
                   PR.
                   Cata[ntilde]o
                   Municipio, PR.
                   Cayey Municipio, PR.
                   Ciales Municipio, PR
                   Cidra Municipio, PR.
                   Comer[iacute]o
                   Municipio, PR.
                   Corozal Municipio,
                   PR.
                   Dorado Municipio, PR
                   Florida Municipio,
                   PR.
                   Guaynabo Municipio,
                   PR.
                   Gurabo Municipio, PR
                   Hatillo Municipio,
                   PR.
                   Humacao Municipio,
                   PR.
                   Juncos Municipio, PR
                   Las Piedras
                   Municipio, PR.
                   Lo[iacute]za
                   Municipio, PR.
                   Manat[iacute]
                   Municipio, PR.
                   Maunabo Municipio,
                   PR.
                   Morovis Municipio,
                   PR.
                   Naguabo Municipio,
                   PR.
                   Naranjito Municipio,
                   PR.
                   Orocovis Municipio,
                   PR.
                   Quebradillas
                   Municipio, PR.
                   R[iacute]o Grande
                   Municipio, PR.
                   San Juan Municipio,
                   PR.
                   San Lorenzo
                   Municipio, PR.
                   Toa Alta Municipio,
                   PR.
                   Toa Baja Municipio,
                   PR.
                   Trujillo Alto
                   Municipio, PR.
                   Vega Alta Municipio,
                   PR.
                   Vega Baja Municipio,
                   PR.
                   Yabucoa Municipio,
                   PR.
42020...........  San Luis Obispo-Paso      1.0809     1.1079     1.1349
                   Robles, CA.
                   San Luis Obispo
                   County, CA.
42044...........  Santa Ana-Anaheim-        1.0935     1.1247     1.1559
                   Irvine, CA.
                   Orange County, CA...
42060...........  Santa Barbara-Santa       1.1016     1.1355     1.1694
                   Maria, CA.
                   Santa Barbara
                   County, CA.
42100...........  Santa Cruz-               1.3100     1.4133     1.5166
                   Watsonville, CA.
                   Santa Cruz County,
                   CA.
42140...........  Santa Fe, NM.........     1.0552     1.0736     1.0920
                   Santa Fe County, NM.
42220...........  Santa Rosa-Petaluma,      1.2096     1.2794     1.3493
                   CA.

[[Page 27926]]

 
                   Sonoma County, CA...
42260...........  Sarasota-Bradenton-       0.9783     0.9711     0.9639
                   Venice, FL.
                   Manatee County, FL..
                   Sarasota County, FL.
42340...........  Savannah, GA.........     0.9677     0.9569     0.9461
                   Bryan County, GA....
                   Chatham County, GA..
                   Effingham County, GA
42540...........  Scranton--Wilkes-         0.9124     0.8832     0.8540
                   Barre, PA.
                   Lackawanna County,
                   PA.
                   Luzerne County, PA..
                   Wyoming County, PA..
42644...........  Seattle-Bellevue-         1.0946     1.1262     1.1577
                   Everett, WA.
                   King County, WA.....
                   Snohomish County, WA
42680...........  Sebastian-Vero Beach,     0.9660     0.9547     0.9434
                   FL.
                   Indian River County,
                   FL.
43100...........  Sheboygan, WI........     0.9347     0.9129     0.8911
                   Sheboygan County, WI
43300...........  Sherman-Denison, TX..     0.9704     0.9606     0.9507
                   Grayson County, TX..
43340...........  Shreveport-Bossier        0.9256     0.9008     0.8760
                   City, LA.
                   Bossier Parish, LA..
                   Caddo Parish, LA....
                   De Soto Parish, LA..
43580...........  Sioux City, IA-NE-SD.     0.9629     0.9505     0.9381
                   Woodbury County, IA.
                   Dakota County, NE...
                   Dixon County, NE....
                   Union County, SD....
43620...........  Sioux Falls, SD......     0.9781     0.9708     0.9635
                   Lincoln County, SD..
                   McCook County, SD...
                   Minnehaha County, SD
                   Turner County, SD...
43780...........  South Bend-Mishawaka,     0.9873     0.9830     0.9788
                   IN-MI.
                   St. Joseph County,
                   IN.
                   Cass County, MI.....
43900...........  Spartanburg, SC......     0.9503     0.9338     0.9172
                   Spartanburg County,
                   SC.
44060...........  Spokane, WA..........     1.0543     1.0724     1.0905
                   Spokane County, WA..
44100...........  Springfield, IL......     0.9275     0.9034     0.8792
                   Menard County, IL...
                   Sangamon County, IL.
44140...........  Springfield, MA......     1.0149     1.0198     1.0248
                   Franklin County, MA.
                   Hampden County, MA..
                   Hampshire County, MA
44180...........  Springfield, MO......     0.8942     0.8590     0.8237
                   Christian County, MO
                   Dallas County, MO...
                   Greene County, MO...
                   Polk County, MO.....
                   Webster County, MO..
44220...........  Springfield, OH......     0.9038     0.8717     0.8396
                   Clark County, OH....
44300...........  State College, PA....     0.9014     0.8685     0.8356
                   Centre County, PA...
44700...........  Stockton, CA.........     1.0784     1.1046     1.1307
                   San Joaquin County,
                   CA.
44940...........  Sumter, SC...........     0.9026     0.8702     0.8377
                   Sumter County, SC...
45060...........  Syracuse, NY.........     0.9744     0.9659     0.9574
                   Madison County, NY..
                   Onondaga County, NY.
                   Oswego County, NY...
45104...........  Tacoma, WA...........     1.0445     1.0594     1.0742

[[Page 27927]]

 
                   Pierce County, WA...
45220...........  Tallahassee, FL......     0.9213     0.8950     0.8688
                   Gadsden County, FL..
                   Jefferson County, FL
                   Leon County, FL.....
                   Wakulla County, FL..
45300...........  Tampa-St. Petersburg-     0.9540     0.9386     0.9233
                   Clearwater, FL.
                   Hernando County, FL.
                   Hillsborough County,
                   FL.
                   Pasco County, FL....
                   Pinellas County, FL.
45460...........  Terre Haute, IN......     0.8982     0.8643     0.8304
                   Clay County, IN.....
                   Sullivan County, IN.
                   Vermillion County,
                   IN.
                   Vigo County, IN.....
45500...........  Texarkana, TX-            0.8970     0.8626     0.8283
                   Texarkana, AR.
                   Miller County, AR...
                   Bowie County, TX....
45780...........  Toledo, OH...........     0.9744     0.9659     0.9574
                   Fulton County, OH...
                   Lucas County, OH....
                   Ottawa County, OH...
                   Wood County, OH.....
45820...........  Topeka, KS...........     0.9352     0.9136     0.8920
                   Jackson County, KS..
                   Jefferson County, KS
                   Osage County, KS....
                   Shawnee County, KS..
                   Wabaunsee County, KS
45940...........  Trenton-Ewing, NJ....     1.0500     1.0667     1.0834
                   Mercer County, NJ...
46060...........  Tucson, AZ...........     0.9404     0.9206     0.9007
                   Pima County, AZ.....
46140...........  Tulsa, OK............     0.9126     0.8834     0.8543
                   Creek County, OK....
                   Okmulgee County, OK.
                   Osage County, OK....
                   Pawnee County, OK...
                   Rogers County, OK...
                   Tulsa County, OK....
                   Wagoner County, OK..
46220...........  Tuscaloosa, AL.......     0.9187     0.8916     0.8645
                   Greene County, AL...
                   Hale County, AL.....
                   Tuscaloosa County,
                   AL.
46340...........  Tyler, TX............     0.9501     0.9334     0.9168
                   Smith County, TX....
46540...........  Utica-Rome, NY.......     0.9015     0.8686     0.8358
                   Herkimer County, NY.
                   Oneida County, NY...
46660...........  Valdosta, GA.........     0.9320     0.9093     0.8866
                   Brooks County, GA...
                   Echols County, GA...
                   Lanier County, GA...
                   Lowndes County, GA..
46700...........  Vallejo-Fairfield, CA     1.2962     1.3949     1.4936
                   Solano County, CA...
47020...........  Victoria, TX.........     0.8896     0.8528     0.8160
                   Calhoun County, TX..
                   Goliad County, TX...
                   Victoria County, TX.
47220...........  Vineland-Millville-       0.9896     0.9862     0.9827
                   Bridgeton, NJ.
                   Cumberland County,
                   NJ.
47260...........  Virginia Beach-           0.9279     0.9039     0.8799
                   Norfolk-Newport
                   News, VA-NC.
                   Currituck County, NC
                   Gloucester County,
                   VA.
                   Isle of Wight
                   County, VA.

[[Page 27928]]

 
                   James City County,
                   VA.
                   Mathews County, VA..
                   Surry County, VA....
                   York County, VA.....
                   Chesapeake City, VA.
                   Hampton City, VA....
                   Newport News City,
                   VA.
                   Norfolk City, VA....
                   Poquoson City, VA...
                   Portsmouth City, VA.
                   Suffolk City, VA....
                   Virginia Beach City,
                   VA.
                   Williamsburg City,
                   VA.
47300...........  Visalia-Porterville,      1.0074     1.0098     1.0123
                   CA.
                   Tulare County, CA...
47380...........  Waco, TX.............     0.9111     0.8814     0.8518
                   McLennan County, TX.
47580...........  Warner Robins, GA....     0.9187     0.8916     0.8645
                   Houston County, GA..
47644...........  Warren-Troy-              0.9923     0.9897     0.9871
                   Farmington Hills, MI.
                   Lapeer County, MI...
                   Livingston County,
                   MI.
                   Macomb County, MI...
                   Oakland County, MI..
                   St. Clair County, MI
47894...........  Washington-Arlington-     1.0556     1.0741     1.0926
                   Alexandria, DC-VA-MD-
                   WV.
                   District of
                   Columbia, DC.
                   Calvert County, MD..
                   Charles County, MD..
                   Prince George's
                   County, MD.
                   Arlington County, VA
                   Clarke County, VA...
                   Fairfax County, VA..
                   Fauquier County, VA.
                   Loudoun County, VA..
                   Prince William
                   County, VA.
                   Spotsylvania County,
                   VA.
                   Stafford County, VA.
                   Warren County, VA...
                   Alexandria City, VA.
                   Fairfax City, VA....
                   Falls Church City,
                   VA.
                   Fredericksburg City,
                   VA.
                   Manassas City, VA...
                   Manassas Park City,
                   VA.
                   Jefferson County, WV
47940...........  Waterloo-Cedar Falls,     0.9134     0.8846     0.8557
                   IA.
                   Black Hawk County,
                   IA.
                   Bremer County, IA...
                   Grundy County, IA...
48140...........  Wausau, WI...........     0.9754     0.9672     0.9590
                   Marathon County, WI.
48260...........  Weirton-Steubenville,     0.8691     0.8255     0.7819
                   WV-OH.
                   Jefferson County, OH
                   Brooke County, WV...
                   Hancock County, WV..
48300...........  Wenatchee, WA........     1.0042     1.0056     1.0070
                   Chelan County, WA...
                   Douglas County, WA..
48424...........  West Palm Beach-Boca      1.0040     1.0054     1.0067
                   Raton-Boynton Beach,
                   FL.
                   Palm Beach County,
                   FL.
48540...........  Wheeling, WV-OH......     0.8297     0.7729     0.7161
                   Belmont County, OH..
                   Marshall County, WV.
                   Ohio County, WV.....
48620...........  Wichita, KS..........     0.9492     0.9322     0.9153
                   Butler County, KS...
                   Harvey County, KS...

[[Page 27929]]

 
                   Sedgwick County, KS.
                   Sumner County, KS...
48660...........  Wichita Falls, TX....     0.8971     0.8628     0.8285
                   Archer County, TX...
                   Clay County, TX.....
                   Wichita County, TX..
48700...........  Williamsport, PA.....     0.9018     0.8691     0.8364
                   Lycoming County, PA.
48864...........  Wilmington, DE-MD-NJ.     1.0283     1.0377     1.0471
                   New Castle County,
                   DE.
                   Cecil County, MD....
                   Salem County, NJ....
48900...........  Wilmington, NC.......     0.9749     0.9666     0.9582
                   Brunswick County, NC
                   New Hanover County,
                   NC.
                   Pender County, NC...
49020...........  Winchester, VA-WV....     1.0128     1.0171     1.0214
                   Frederick County, VA
                   Winchester City, VA.
                   Hampshire County, WV
49180...........  Winston-Salem, NC....     0.9366     0.9155     0.8944
                   Davie County, NC....
                   Forsyth County, NC..
                   Stokes County, NC...
                   Yadkin County, NC...
49340...........  Worcester, MA........     1.0617     1.0822     1.1028
                   Worcester County, MA
49420...........  Yakima, WA...........     1.0093     1.0124     1.0155
                   Yakima County, WA...
49500...........  Yauco, PR............     0.6645     0.5526     0.4408
                   Gu[aacute]nica
                   Municipio, PR.
                   Guayanilla
                   Municipio, PR.
                   Pe[ntilde]uelas
                   Municipio, PR.
                   Yauco Municipio, PR.
49620...........  York-Hanover, PA.....     0.9608     0.9478     0.9347
                   York County, PA.....
49660...........  Youngstown-Warren-        0.9162     0.8882     0.8603
                   Boardman, OH-PA.
                   Mahoning County, OH.
                   Trumbull County, OH.
                   Mercer County, PA...
49700...........  Yuba City, CA........     1.0553     1.0737     1.0921
                   Sutter County, CA...
                   Yuba County, CA.....
49740...........  Yuma, AZ.............     0.9476     0.9301     0.9126
                   Yuma County, AZ.....
------------------------------------------------------------------------
\1\ As discussed in section IV.D.1.d. of the preamble of this final
  rule, because there will no longer be any LTCHs in their cost
  reporting periods that began during FYs 2003 or 2004 (the first and
  second years of the 5-year wage index phase- in, respectively), we are
  no longer showing the \1/5\ and \2/5\ wage index value. For further
  details on the 5-year phase-in of the wage index, see section
  IV.D.1.of this final rule.
\2\ Three-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2004 through
  September 30, 2005 (Federal FY 2005). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2005 and located in
  Chicago, Illinois (CBSA 16974), the 3/5ths wage index value is
  computed as ((3*1.0790) + 2))/5 = 1.0474. For further details on the 5-
   year phase-in of the wage index, see section IV.D.1. of this final
  rule.
\3\ Four-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2005 through
  September 30, 2006 (Federal FY 2006). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2006 and located in
  Chicago, Illinois (CBSA 16974), the 4/5ths wage index value is
  computed as ((4*1.0790) + 1))/5 = 1.0632. For further details on the 5-
   year phase-in of the wage index, see section IV.D.1. of this final
  rule.
\4\ The wage index values are calculated using the same wage data used
  to compute the wage index used by acute care hospitals under the IPPS
  for Federal FY 2006 (that is, fiscal year 2002 audited acute care
  hospital inpatient wage data without regard to reclassification under
  section 1886(d)(8) or section 1886(d)(10) of the Act).


    Table 2.--Long-Term Care Hospital Wage Index for Rural Areas for
    Discharges Occurring From July 1, 2006 Through June 30, 2007 \1\
------------------------------------------------------------------------
                                           3/5ths     4/5ths      Full
   CBSA  code         Nonurban area         wage       wage       wage
                                         index \2\  index \3\  index \4\
------------------------------------------------------------------------
01.............  Alabama...............     0.8468     0.7957     0.7446

[[Page 27930]]

 
02.............  Alaska................     1.1186     1.1582     1.1977
03.............  Arizona...............     0.9261     0.9014     0.8768
04.............  Arkansas..............     0.8480     0.7973     0.7466
05.............  California............     1.0632     1.0843     1.1054
06.............  Colorado..............     0.9628     0.9504     0.9380
07.............  Connecticut...........     1.1038     1.1384     1.1730
08.............  Delaware..............     0.9747     0.9663     0.9579
10.............  Florida...............     0.9141     0.8854     0.8568
11.............  Georgia...............     0.8597     0.8130     0.7662
12.............  Hawaii................     1.0331     1.0441     1.0551
13.............  Idaho.................     0.8822     0.8430     0.8037
14.............  Illinois..............     0.8963     0.8617     0.8271
15.............  Indiana...............     0.9174     0.8899     0.8624
16.............  Iowa..................     0.9105     0.8807     0.8509
17.............  Kansas................     0.8821     0.8428     0.8035
18.............  Kentucky..............     0.8660     0.8213     0.7766
19.............  Louisiana.............     0.8447     0.7929     0.7411
20.............  Maine.................     0.9306     0.9074     0.8843
21.............  Maryland..............     0.9612     0.9482     0.9353
22.............  Massachusetts \5\.....  .........  .........  .........
23.............  Michigan..............     0.9337     0.9116     0.8895
24.............  Minnesota.............     0.9479     0.9306     0.9132
25.............  Mississippi...........     0.8604     0.8139     0.7674
26.............  Missouri..............     0.8740     0.8320     0.7900
27.............  Montana...............     0.9257     0.9010     0.8762
28.............  Nebraska..............     0.9194     0.8926     0.8657
29.............  Nevada................     0.9439     0.9252     0.9065
30.............  New Hampshire.........     1.0490     1.0654     1.0817
31.............  New Jersey \5\........  .........  .........  .........
32.............  New Mexico............     0.9181     0.8908     0.8635
33.............  New York..............     0.8892     0.8523     0.8154
34.............  North Carolina........     0.9124     0.8832     0.8540
35.............  North Dakota..........     0.8357     0.7809     0.7261
36.............  Ohio..................     0.9296     0.9061     0.8826
37.............  Oklahoma..............     0.8549     0.8065     0.7581
38.............  Oregon................     0.9896     0.9861     0.9826
39.............  Pennsylvania..........     0.8975     0.8633     0.8291
40.............  Puerto Rico \5\.......  .........  .........  .........
41.............  Rhode Island \5\......  .........  .........  .........
42.............  South Carolina........     0.9183     0.8910     0.8638
43.............  South Dakota..........     0.9136     0.8848     0.8560
44.............  Tennessee.............     0.8737     0.8316     0.7895
45.............  Texas.................     0.8802     0.8402     0.8003
46.............  Utah..................     0.8871     0.8494     0.8118
47.............  Vermont...............     0.9898     0.9864     0.9830
49.............  Virginia..............     0.8808     0.8410     0.8013
50.............  Washington............     1.0306     1.0408     1.0510
51.............  West Virginia.........     0.8630     0.8174     0.7717
52.............  Wisconsin.............     0.9705     0.9607     0.9509
53.............  Wyoming...............     0.9554     0.9406    0.9257
------------------------------------------------------------------------
\1\ As discussed insection IV.D.1.d. of the preamble of this final rule,
  because there are no longer any LTCHs in their cost reporting periods
  that began during FYs 2003 and 2004 (the first and second years of the
  5-year wage index phase-in, respectively), weare no longer showing the
  1/5th and 2/5ths wage index value. For further details on the 5-year
  phase- in of the wage index, see section IV.D.1. of this final rule.
\2\ The wage index values are calculated using the same wage data used
  to compute the wage index used by acute care hospitals under the IPPS
  for Federal FY 2006 (that is, fiscal year 2002 audited acute care
  hospital in patient waged at a without regard to reclassification
  under section 1886(d)(8) or section 1886(d)(10) of the Act).
\3\ Three-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2004 through
  September 30, 2005 (Federal FY 2005). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2005 and located in
  rural Illinois, the 3/5ths wage index value is computed as ((3*0.8271)
  + 2))/5 = 0.8963. For further details on the 5-year phase-in of the
  wage index, see section IV.D.1. of this final rule.
\4\ Four-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2005 through
  September 30, 2006 (Federal FY 2006). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2006 and located in
  rural Illinois, the 4/5ths wage index value is computed as ((3*0.9271)
  + 2))/5 = 0.8617. For further details on the 5-year phase-in of the
  wage index, see section IV.D.1. of this final rule.
\5\ All counties with in the State are classified as urban.


[[Page 27931]]


 Table 3.--FY 2006 LTC-DRGs, Relative Weights, Geometric Average Length
     of Stay and Five-Sixths of the Geometric Average Length of Stay
 [Effective for discharges occurring on or after October 1, 2005 through
                           September 30, 2006]
------------------------------------------------------------------------
                                                             Five-sixths
                                                 Geometric      of the
     LTC-DRG        Description      Relative      avenue     geometric
                                      weight     length of    length of
                                                    stay         stay
------------------------------------------------------------------------
1...............  \5\ CRANIOTOMY        1.7034         38.5         32.1
                   AGE >17 W CC.
2...............  \7\ CRANIOTOMY        1.7034         38.5         32.1
                   AGE >17 W/O CC.
3...............  \7\ CRANIOTOMY        1.7034         38.5         32.1
                   AGE 0-17.
6...............  \7\ CARPAL            0.4499         19.0         15.8
                   TUNNEL RELEASE.
7...............  PERIPH &              1.3984         37.7         31.4
                   CRANIAL NERVE
                   & OTHER NERV
                   SYST PROC W CC.
8...............  \3\ PERIPH &          0.7637         24.8         20.7
                   CRANIAL NERVE
                   & OTHER NERV
                   SYST PROC W/O
                   CC.
9...............  SPINAL                0.9720         33.7         28.1
                   DISORDERS &
                   INJURIES.
10..............  NERVOUS SYSTEM        0.7554         24.5         20.4
                   NEOPLASMS W CC.
11..............  \2\ NERVOUS           0.5837         21.3         17.8
                   SYSTEM
                   NEOPLASMS W/O
                   CC.
12..............  DEGENERATIVE          0.6851         25.5         21.3
                   NERVOUS SYSTEM
                   DISORDERS.
13..............  MULTIPLE              0.6531         23.1         19.3
                   SCLEROSIS &
                   CEREBELLAR
                   ATAXIA.
14..............  INTERCRANIAL          0.7783         26.0         21.7
                   HEMORRHAGE OR
                   STROKE WITH
                   INFARCT.
15..............  NONSPECIFIC CVA       0.7314         26.8         22.3
                   & PRECEREBRAL
                   OCCULUSION
                   WITHOUT
                   INFARCT.
16..............  NONSPECIFIC           0.7471         23.5         19.6
                   CEREBROVASCULA
                   R DISORDERS W
                   CC.
17..............  \1\ NONSPECIFIC       0.4499         19.0         15.8
                   CEREBROVASCULA
                   R DISORDERS W/
                   O CC.
18..............  CRANIAL &             0.7197         23.6         19.7
                   PERIPHERAL
                   NERVE
                   DISORDERS W CC.
19..............  CRANIAL &             0.4773         21.2         17.7
                   PERIPHERAL
                   NERVE
                   DISORDERS W/O
                   CC.
20..............  NERVOUS SYSTEM        1.0277         27.2         22.7
                   INFECTION
                   EXCEPT VIRAL
                   MENINGITIS.
21..............  \3\ VIRAL             0.7637         24.8         20.7
                   MENINGITIS.
22..............  \4\                   1.1823         29.6         24.7
                   HYPERTENSIVE
                   ENCEPHALOPATHY.
23..............  NONTRAUMATIC          0.8054         25.4         21.2
                   STUPOR & COMA.
24..............  SEIZURE &             0.6251         22.6         18.8
                   HEADACHE AGE
                   >17 W CC.
25..............  \1\ SEIZURE &         0.4499         19.0         15.8
                   HEADACHE AGE
                   >17 W/O CC.
26..............  \7\ SEIZURE &         0.4499         19.0         15.8
                   HEADACHE AGE 0-
                   17.
27..............  TRAUMATIC             0.9444         27.1         22.6
                   STUPOR & COMA,
                   COMA >1 HR.
28..............  TRAUMATIC             0.8890         30.2         25.2
                   STUPOR & COMA,
                   COMA <1 HR AGE
                   >17 W CC.
29..............  \2\ TRAUMATIC         0.5837         21.3         17.8
                   STUPOR & COMA,
                   COMA <1 HR AGE
                   >17 W/O CC.
30..............  \7\ TRAUMATIC         0.5837         21.3         17.8
                   STUPOR & COMA,
                   COMA <1 HR AGE
                   0-17.
31..............  \3\ CONCUSSION        0.7637         24.8         20.7
                   AGE >17 W CC.
32..............  \7\ CONCUSSION        0.4499         19.0         15.8
                   AGE >17 W/O CC.
33..............  \7\ CONCUSSION        0.4499         19.0         15.8
                   AGE 0-17.
34..............  OTHER DISORDERS       0.8004         25.3         21.1
                   OF NERVOUS
                   SYSTEM W CC.
35..............  OTHER DISORDERS       0.5698         24.2         20.2
                   OF NERVOUS
                   SYSTEM W/O CC.
36..............  \7\ RETINAL           1.1820         29.6         24.7
                   PROCEDURES.
37..............  \7\ ORBITAL           1.1820         29.6         24.7
                   PROCEDURES.
38..............  \7\ PRIMARY           1.1820         29.6         24.7
                   IRIS
                   PROCEDURES.
39..............  \7\ LENS              1.1820         29.6         24.7
                   PROCEDURES
                   WITH OR
                   WITHOUT
                   VITRECTOMY.
40..............  \4\ EXTRAOCULAR       1.1820         29.6         24.7
                   PROCEDURES
                   EXCEPT ORBIT
                   AGE >17.
41..............  \7\ EXTRAOCULAR       1.1820         29.6         24.7
                   PROCEDURES
                   EXCEPT ORBIT
                   AGE 0-17.
42..............  \7\ INTRAOCULAR       1.1820         29.6         24.7
                   PROCEDURES
                   EXCEPT RETINA,
                   IRIS & LENS.
43..............  \7\ HYPHEMA....       1.1820         29.6         24.7
44..............  \2\ ACUTE MAJOR       0.5837         21.3         17.8
                   EYE INFECTIONS.
45..............  \7\                   1.1820         29.6         24.7
                   NEUROLOGICAL
                   EYE DISORDERS.
46..............  \2\ OTHER             0.5837         21.3         17.8
                   DISORDERS OF
                   THE EYE AGE
                   >17 W CC.
47..............  \7\ OTHER             1.1820         29.6         24.7
                   DISORDERS OF
                   THE EYE AGE
                   >17 W/O CC.
48..............  \7\ OTHER             1.1820         29.6         24.7
                   DISORDERS OF
                   THE EYE AGE 0-
                   17.
49..............  \7\ MAJOR HEAD        1.1820         29.6         24.7
                   & NECK
                   PROCEDURES.
50..............  S \7\                 1.1820         29.6         24.7
                   IALOADENECTOMY.
51..............  \7\ SALIVARY          1.1820         29.6         24.7
                   GLAND
                   PROCEDURES
                   EXCEPT
                   SIALOADENECTOM
                   Y.
52..............  \7\ CLEFT LIP &       1.1820         29.6         24.7
                   PALATE REPAIR.
53..............  \7\ SINUS &           1.1820         29.6         24.7
                   MASTOID
                   PROCEDURES AGE
                   >17.
54..............  \7\ SINUS &           1.1820         29.6         24.7
                   MASTOID
                   PROCEDURES AGE
                   0-17.
55..............  \7\                   1.1820         29.6         24.7
                   MISCELLANEOUS
                   EAR, NOSE,
                   MOUTH & THROAT
                   PROCEDURES.
56..............  \7\ RHINOPLASTY       1.1820         29.6         24.7
57..............  T&A PROC,             0.4499         19.0         15.8
                   EXCEPT
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE >17.
58..............  \7\ T&A PROC,         0.4499         19.0         15.8
                   EXCEPT
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE 0-17.
59..............  \7\                   0.4499         19.0         15.8
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE >17
                   9.
60..............  \7\                   0.4499         19.0         15.8
                   TONSILLECTOMY
                   &/OR
                   ADENOIDECTOMY
                   ONLY, AGE 0-17.
61..............  \3\ MYRINGOTOMY       0.7637         24.8         20.7
                   W TUBE
                   INSERTION AGE
                   >17.
62..............  \7\ MYRINGOTOMY       0.4499         19.0         15.8
                   W TUBE
                   INSERTION AGE
                   0-17.
63..............  \4\ OTHER EAR,        1.1820         29.6         24.7
                   NOSE, MOUTH &
                   THROAT O.R.
                   PROCEDURES.
64..............  EAR, NOSE,            1.1480         26.2         21.8
                   MOUTH & THROAT
                   MALIGNANCY.
65..............  \1\                   0.4499         19.0         15.8
                   DYSEQUILIBRIUM.
66..............  \7\ EPISTAXIS..       0.4499         19.0         15.8

[[Page 27932]]

 
67..............  \3\                   0.7637         24.8         20.7
                   EPIGLOTTITIS.
68..............  OTITIS MEDIA &         0.511         18.0         15.0
                   URI AGE >17 W
                   CC1.
69..............  \1\ OTITIS            0.4499         19.0         15.8
                   MEDIA & URI
                   AGE >17 W/O CC.
70..............  \7\ OTITIS            0.4499         19.0         15.8
                   MEDIA & URI
                   AGE 0-17.
71..............  \7\                   0.5837         21.3         17.8
                   LARYNGOTRACHEI
                   TIS.
72..............  \7\ NASAL             0.7637         24.8         20.7
                   TRAUMA &
                   DEFORMITY.
73..............  OTHER EAR,            0.7535         21.9         18.3
                   NOSE, MOUTH &
                   THROAT
                   DIAGNOSES AGE
                   >17.
74..............  \7\ OTHER EAR,        0.4499         19.0         15.8
                   NOSE, MOUTH &
                   THROAT
                   DIAGNOSES AGE
                   0-17.
75..............  \5\ MAJOR CHEST       1.7034         38.5         32.1
                   PROCEDURES.
76..............  OTHER RESP            2.5523         43.9         36.6
                   SYSTEM O.R.
                   PROCEDURES W
                   CC.
77..............  \5\ OTHER RESP        1.7034         38.5         32.1
                   SYSTEM O.R.
                   PROCEDURES W/O
                   CC.
78..............  PULMONARY             0.6900         21.9         18.3
                   EMBOLISM.
79..............  RESPIRATORY           0.8280         22.9         19.1
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE >17 W CC.
80..............  RESPIRATORY           0.5986         21.7         18.1
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE >17 W/O CC.
81..............  \7\ RESPIRATORY       0.4499         19.0         15.8
                   INFECTIONS &
                   INFLAMMATIONS
                   AGE 0-17.
82..............  RESPIRATORY           0.7174         20.1         16.8
                   NEOPLASMS.
83..............  \2\ MAJOR CHEST       0.5837         21.3         17.8
                   TRAUMA W CC.
84..............  \7\ MAJOR CHEST       0.5837         21.3         17.8
                   TRAUMA W/O CC.
85..............  PLEURAL               0.7264         21.2         17.7
                   EFFUSION W CC.
86..............  \1\ PLEURAL           0.4499         19.0         15.8
                   EFFUSION W/O
                   CC.
87..............  PULMONARY EDEMA       1.0812         25.4         21.2
                   & RESPIRATORY
                   FAILURE.
88..............  CHRONIC               0.6585         19.6         16.3
                   OBSTRUCTIVE
                   PULMONARY
                   DISEASE.
89..............  SIMPLE                0.6987         20.8         17.3
                   PNEUMONIA &
                   PLEURISY AGE
                   >17 W CC.
90..............  SIMPLE                0.4970         17.8         14.8
                   PNEUMONIA &
                   PLEURISY AGE
                   >17 W/O CC.
91..............  \7\ SIMPLE            0.4499         19.0         15.8
                   PNEUMONIA &
                   PLEURISY AGE 0-
                   17.
92..............  INTERSTITIAL           0.670         20.2         16.8
                   LUNG DISEASE W
                   CC.
93..............  \2\                   0.5837         21.3         17.8
                   INTERSTITIAL
                   LUNG DISEASE W/
                   O CC.
94..............  PNEUMOTHORAX W        0.5880         17.0         14.2
                   CC.
95..............  PNEUMOTHORAX W/       0.4499         19.0         15.8
                   O CC.
96..............  BRONCHITIS &          0.6417         19.4         16.2
                   ASTHMA AGE >17
                   W CC.
97..............  \2\ BRONCHITIS        0.5837         21.3         17.8
                   & ASTHMA AGE
                   >17 W/O CC.
98..............  \7\ BRONCHITIS        0.5837         21.3         17.8
                   & ASTHMA AGE 0-
                   17.
99..............  RESPIRATORY           0.9219         23.2         19.3
                   SIGNS &
                   SYMPTOMS W CC.
100.............  \3\ RESPIRATORY       0.7637         24.8         20.7
                   SIGNS &
                   SYMPTOMS W/O
                   CC.
101.............  OTHER                 0.8147         21.1         17.6
                   RESPIRATORY
                   SYSTEM
                   DIAGNOSES W CC.
102.............  \1\ OTHER             0.4499         19.0         15.8
                   RESPIRATORY
                   SYSTEM
                   DIAGNOSES W/O
                   CC.
103.............  \6\ HEART             0.0000          0.0          0.0
                   TRANSPLANT OR
                   IMPLANT OF
                   HEART ASSIST
                   SYSTEM.
104.............  \7\ CARDIAC           0.7637         24.8         20.7
                   VALVE & OTHER
                   MAJOR
                   CARDIOTHORACIC
                   PROC W CARDIAC
                   CATH.
105.............  \7\ CARDIAC           0.7637         24.8         20.7
                   VALVE & OTHER
                   MAJOR
                   CARDIOTHORACIC
                   PROC W/O
                   CARDIAC CATH.
106.............  \7\ CORONARY          0.7637         24.8         20.7
                   BYPASS W PTCA.
108.............  \7\ OTHER             0.7637         24.8         20.7
                   CARDIOTHORACIC
                   PROCEDURES.
110.............  MAJOR                 0.7637         24.8         20.7
                   CARDIOVASCULAR
                   PROCEDURES W
                   CC.
111.............  \7\ MAJOR              0.763         24.8         20.7
                   CARDIOVASCULAR
                   PROCEDURES W/O
                   CC.
113.............  AMPUTATION FOR        1.4887         39.3         32.8
                   CIRC SYSTEM
                   DISORDERS
                   EXCEPT UPPER
                   LIMB & TOE.
114.............  UPPER LIMB &          1.2389         33.2         27.7
                   TOE AMPUTATION
                   FOR CIRC
                   SYSTEM
                   DISORDERS.
117.............  \4\ CARDIAC           1.1820         29.6         24.7
                   PACEMAKER
                   REVISION
                   EXCEPT DEVICE
                   REPLACEMENT.
118.............  \4\ CARDIAC           1.1820         29.6         24.7
                   PACEMAKER
                   DEVICE
                   REPLACEMENT.
119.............  \4\ VEIN              0.7637         24.8         20.7
                   LIGATION &
                   STRIPPING.
120.............  OTHER                 1.0979         31.7         26.4
                   CIRCULATORY
                   SYSTEM O.R.
                   PROCEDURES.
121.............  CIRCULATORY           0.8429         23.2         19.3
                   DISORDERS W
                   AMI & MAJOR
                   COMP,
                   DISCHARGED
                   ALIVE.
122.............  \4\ CIRCULATORY       0.5837         21.3         17.8
                   DISORDERS W
                   AMI W/O MAJOR
                   COMP,
                   DISCHARGED
                   ALIVE.
123.............  CIRCULATORY           1.1811         20.4         17.0
                   DISORDERS W
                   AMI, EXPIRED.
124.............  \4\ CIRCULATORY       1.1820         29.6         24.7
                   DISORDERS
                   EXCEPT AMI, W
                   CARD CATH &
                   COMPLEX DIAG.
125.............  \3\ CIRCULATORY       0.7637         24.8         20.7
                   DISORDERS
                   EXCEPT AMI, W
                   CARD CATH W/O
                   COMPLEX DIAG.
126.............  ACUTE &               0.8386         25.3         21.1
                   SUBACUTE
                   ENDOCARDITIS.
127.............  HEART FAILURE &       0.6857         21.2         17.7
                   SHOCK.
128.............  \2\ DEEP VEIN         0.5837         21.3         17.8
                   THROMBOPHLEBIT
                   IS.
129.............  \7\ CARDIAC           0.7637         24.8         20.7
                   ARREST,
                   UNEXPLAINED.
130.............  PERIPHERAL            0.6741         23.2         19.3
                   VASCULAR
                   DISORDERS W CC.
131.............  PERIPHERAL            0.4675         20.4         17.0
                   VASCULAR
                   DISORDERS W/O
                   CC.
132.............  ATHEROSCLEROSIS       0.6565         21.8         18.2
                   W CC.
133.............  \1\                   0.4499         19.0         15.8
                   ATHEROSCLEROSI
                   S W/O CC.
134.............  HYPERTENSION...       0.6354         24.8         20.7

[[Page 27933]]

 
135.............  CARDIAC               0.7211         23.7         19.8
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   >17 W CC.
136.............  \2\ CARDIAC           0.5837          2.3         17.8
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   >17 W/O CC.
137.............  \7\ CARDIAC           0.5837         21.3         17.8
                   CONGENITAL &
                   VALVULAR
                   DISORDERS AGE
                   0-17.
138.............  CARDIAC               0.6201         20.5         17.1
                   ARRHYTHMIA &
                   CONDUCTION
                   DISORDERS W CC.
139.............  \2\ CARDIAC           0.5837          2.3         17.8
                   ARRHYTHMIA &
                   CONDUCTION
                   DISORDERS W/O
                   CC.
140.............  \1\ ANGINA            0.4499         19.0         15.8
                   PECTORIS.
141.............  \8\ SYNCOPE &         0.4271         18.3         15.3
                   COLLAPSE W CC.
142.............  \8\ SYNCOPE &         0.4271         18.3         15.3
                   COLLAPSE W/O
                   CC.
143.............  \1\ CHEST PAIN.       0.4499         19.0         15.8
144.............  OTHER                 0.7413         21.7         18.1
                   CIRCULATORY
                   SYSTEM
                   DIAGNOSES W CC.
145.............  OTHER                 0.4568         18.2         15.2
                   CIRCULATORY
                   SYSTEM
                   DIAGNOSES W/O
                   CC.
146.............  \7\ RECTAL            1.7034         38.5         32.1
                   RESECTION W CC.
147.............  \7\ RECTAL            1.7034         38.5         32.1
                   RESECTION W/O
                   CC.
148.............  MAJOR SMALL &         1.8616         40.9         34.1
                   LARGE BOWEL
                   PROCEDURES W
                   CC.
149.............  \7\ MAJOR SMALL       0.7637         24.8         20.7
                   & LARGE BOWEL
                   PROCEDURES W/O
                   CC.
150.............  \4\ PERITONEAL        1.1820         29.6         24.7
                   ADHESIOLYSIS W
                   CC.
151.............  \2\ PERITONEAL        0.5837         21.3         17.8
                   ADHESIOLYSIS W/
                   O CC.
152.............  \3\ MINOR SMALL       0.7637         24.8         20.7
                   & LARGE BOWEL
                   PROCEDURES W
                   CC.
153.............  \7\ MINOR SMALL       0.7637         24.8         20.7
                   & LARGE BOWEL
                   PROCEDURES W/O
                   CC.
154.............  \5\ STOMACH,          1.7034         38.5         32.1
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   >17 W CC.
155.............  \7\ STOMACH,          1.7034         38.5         32.1
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   >17 W/O CC.
156.............  \7\ STOMACH,          1.7034         38.5         32.1
                   ESOPHAGEAL &
                   DUODENAL
                   PROCEDURES AGE
                   0-17.
157.............  \4\ ANAL &            1.1820         29.6         24.7
                   STOMAL
                   PROCEDURES W
                   CC.
158.............  \7\ ANAL &            1.1820         29.6         24.7
                   STOMAL
                   PROCEDURES W/O
                   CC.
159.............  \7\ HERNIA            0.7637         24.8         20.7
                   PROCEDURES
                   EXCEPT
                   INGUINAL &
                   FEMORAL AGE
                   >17 W CC.
160.............  \7\ HERNIA            0.7637         24.8         20.7
                   PROCEDURES
                   EXCEPT
                   INGUINAL &
                   FEMORAL AGE
                   >17 W/O CC.
161.............  \5\ INGUINAL &        1.7034         38.5         32.1
                   FEMORAL HERNIA
                   PROCEDURES AGE
                   >17 W CC.
162.............  \7\ INGUINAL &        0.7637         24.8         20.7
                   FEMORAL HERNIA
                   PROCEDURES AGE
                   >17 W/O CC.
163.............  \7\ HERNIA            0.7637         24.8         20.7
                   PROCEDURES AGE
                   0-17.
164.............  \1\                   1.7034         38.5         32.1
                   APPENDECTOMY W
                   COMPLICATED
                   PRINCIPAL DIAG
                   W CC.
165.............  \7\                   1.7034         38.5         32.1
                   APPENDECTOMY W
                   COMPLICATED
                   PRINCIPAL DIAG
                   W/O CC.
166.............  \7\                   1.7034         38.5         32.1
                   APPENDECTOMY W/
                   O COMPLICATED
                   PRINCIPAL DIAG
                   W4 CC.
167.............  \7\                   1.7034         38.5         32.1
                   APPENDECTOMY W/
                   O COMPLICATED
                   PRINCIPAL DIAG
                   W/O CC.
168.............  \4\ MOUTH             1.1820         29.6         24.7
                   PROCEDURES W
                   CC.
169.............  \7\ MOUTH             0.7637         24.8         20.7
                   PROCEDURES W/O
                   CC.
170.............  OTHER DIGESTIVE       1.6271         35.9         29.9
                   SYSTEM O.R.
                   PROCEDURES W
                   CC.
171.............  \1\ OTHER             0.4499         19.0         15.8
                   DIGESTIVE
                   SYSTEM O.R.
                   PROCEDURES W/O
                   CC.
172.............  DIGESTIVE             0.8553         21.8         18.2
                   MALIGNANCY W
                   CC.
173.............  \2\ DIGESTIVE         0.5837         21.3         17.8
                   MALIGNANCY W/O
                   CC.
174.............  G.I. HEMORRHAGE       0.7119         22.2         18.5
                   W CC.
175.............  \1\ G.I.              0.4499         19.0         15.8
                   HEMORRHAGE W/O
                   CC.
176.............  COMPLICATED           0.8426         21.5         17.9
                   PEPTIC ULCER.
177.............  \3\                   0.7637         24.8         20.7
                   UNCOMPLICATED
                   PEPTIC ULCER W
                   CC.
178.............  \3\                   0.7637         24.8         20.7
                   UNCOMPLICATED
                   PEPTIC ULCER W/
                   O CC.
179.............  INFLAMMATORY          0.9675         24.0         20.0
                   BOWEL DISEASE.
180.............  G.I.                  0.9375         23.5         19.6
                   OBSTRUCTION W
                   CC.
181.............  \3\ G.I.              0.7637         24.8         20.7
                   OBSTRUCTION W/
                   O CC.
182.............  ESOPHAGITIS,          0.7745         22.6         18.8
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   >17 W CC.
183.............  ESOPHAGITIS,          0.3870         16.8         14.0
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   >17 W/O CC.
184.............  \7\                   0.4499         19.0         15.8
                   ESOPHAGITIS,
                   GASTROENT &
                   MISC DIGEST
                   DISORDERS AGE
                   0-17.
185.............  \3\ DENTAL &          0.7637         24.8         20.7
                   ORAL DIS
                   EXCEPT
                   EXTRACTIONS &
                   RESTORATIONS,
                   AGE >17.
186.............  \7\ DENTAL &          0.7637         24.8         20.7
                   ORAL DIS
                   EXCEPT
                   EXTRACTIONS &
                   RESTORATIONS,
                   AGE 0-17.
187.............  \7\ DENTAL            0.7637         24.8         20.7
                   EXTRACTIONS &
                   RESTORATIONS.
188.............  OTHER DIGESTIVE       0.9952         24.0         20.0
                   SYSTEM
                   DIAGNOSES AGE
                   >17 W CC.
189.............  OTHER DIGESTIVE       0.4707         18.2         15.2
                   SYSTEM
                   DIAGNOSES AGE
                   >17 W/O CC.
190.............  \7\ OTHER             0.4499         19.0         15.8
                   DIGESTIVE
                   SYSTEM
                   DIAGNOSES AGE
                   0-17.
191.............  \4\ PANCREAS,         1.1820         29.6         24.7
                   LIVER & SHUNT
                   PROCEDURES W
                   CC.
192.............  \7\ PANCREAS,         1.1820         29.6         24.7
                   LIVER & SHUNT
                   PROCEDURES W/O
                   CC.
193.............  \3\ BILIARY           0.7637         24.8         20.7
                   TRACT PROC
                   EXCEPT ONLY
                   CHOLECYST W OR
                   W/O C.D.E. W
                   CC.
194.............  \7\ BILIARY           0.7637         24.8         20.7
                   TRACT PROC
                   EXCEPT ONLY
                   CHOLECYST W OR
                   W/O C.D.E. W/O
                   CC.
195.............  \3\                   0.7637         24.8         20.7
                   CHOLECYSTECTOM
                   Y W C.D.E. W
                   CC.
196.............  \7\                   0.7637         24.8         20.7
                   CHOLECYSTECTOM
                   Y W C.D.E. W/O
                   CC.
197.............  \3\                   0.7637         24.8         20.7
                   CHOLECYSTECTOM
                   Y EXCEPT BY
                   LAPAROSCOPE W/
                   O C.D.E. W CC.
198.............  \7\                   0.7637         24.8         20.7
                   CHOLECYSTECTOM
                   Y EXCEPT BY
                   LAPAROSCOPE W/
                   O C.D.E. W/O
                   CC.
199.............  \7\                   1.7034         38.5         32.1
                   HEPATOBILIARY
                   DIAGNOSTIC
                   PROCEDURE FOR
                   MALIGNANCY.

[[Page 27934]]

 
200.............  \5\                   1.7034         38.5         32.1
                   HEPATOBILIARY
                   DIAGNOSTIC
                   PROCEDURE FOR
                   NON-MALIGNANCY.
201.............  OTHER                 2.0371         36.1         30.1
                   HEPATOBILIARY
                   OR PANCREAS
                   O.R.
                   PROCEDURES.
202.............  CIRRHOSIS &           0.6610         20.6         17.2
                   ALCOHOLIC
                   HEPATITIS.
203.............  MALIGNANCY OF         0.7896         19.5         16.3
                   HEPATOBILIARY
                   SYSTEM OR
                   PANCREAS.
204.............  DISORDERS OF          0.9441         22.7         18.9
                   PANCREAS
                   EXCEPT
                   MALIGNANCY.
205.............  DISORDERS OF          0.6642         20.5         17.1
                   LIVER EXCEPT
                   MALIG, CIRR,
                   ALC HEPA W CC.
206.............  \2\ DISORDERS         0.5837         21.3         17.8
                   OF LIVER
                   EXCEPT MALIG,
                   CIRR, ALC HEPA
                   W/O CC.
207.............  DISORDERS OF          0.7570         21.5         17.9
                   THE BILIARY
                   TRACT W CC.
208.............  \2\ DISORDERS         0.5837         21.3         17.8
                   OF THE BILIARY
                   TRACT W/O CC.
210.............  \5\ HIP & FEMUR       1.7034         38.5         32.1
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE >17
                   W/O CC.
211.............  \4\ HIP & FEMUR       1.1820         29.6         24.7
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE >17
                   W/O CC.
212.............  \7\ HIP & FEMUR       1.7034         38.5         32.1
                   PROCEDURES
                   EXCEPT MAJOR
                   JOINT AGE 0-17.
213.............  AMPUTATION FOR        1.1948         34.0         28.3
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONN TISSUE
                   DISORDERS.
216.............  \4\ BIOPSIES OF       1.1820         29.6         24.7
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE.
217.............  WND DEBRID &          1.2927         38.0         31.7
                   SKN GRFT
                   EXCEPT HAND,
                   FOR MUSCSKELET
                   & CONN TISS
                   DIS.
218.............  \5\ LOWER             1.7034         38.5         32.1
                   EXTREM & HUMER
                   PROC EXCEPT
                   HIP, FOOT,
                   FEMUR AGE >17
                   W CC.
219.............  \1\ LOWER             0.4499         19.0         15.8
                   EXTREM & HUMER
                   PROC EXCEPT
                   HIP, FOOT,
                   FEMUR AGE >17
                   W/O CC.
220.............  \7\ LOWER             1.7034         38.5         32.1
                   EXTREM & HUMER
                   PROC EXCEPT
                   HIP, FOOT,
                   FEMUR AGE 0-17.
223.............  \3\ MAJOR             0.7673         24.8         20.7
                   SHOULDER/ELBOW
                   PROC, OR OTHER
                   UPPER
                   EXTREMITY PROC
                   W CC.
224.............  \7\                   0.7637         24.8         20.7
                   SHOULDER,ELBOW
                   OR FOREARM
                   PROC, EXC
                   MAJOR JOINT
                   PROC, W/O CC.
225.............  FOOT PROCEDURES       0.9869         28.4         23.7
226.............  SOFT TISSUE           0.9443         29.5         24.6
                   PROCEDURES W
                   CC.
227.............  \3\ SOFT TISSUE       0.7637         24.8         20.7
                   PROCEDURES W/O
                   CC.
228.............  \4\ MAJOR THUMB       1.1820         29.6         24.7
                   OR JOINT PROC,
                   OR OTH HAND OR
                   WRIST PROC W
                   CC.
229.............  \7\ HAND OR           0.4499         19.0         15.8
                   WRIST PROC,
                   EXCEPT MAJOR
                   JOINT PROC, W/
                   O CC.
230.............  \5\ LOCAL             1.7034         38.5         32.1
                   EXCISION &
                   REMOVAL OF INT
                   FIX DEVICES OF
                   HIP & FEMUR.
232.............  \7\ ARTHROSCOPY       0.4499         19.0         15.8
233.............  OTHER                 1.3522         34.6         28.8
                   MUSCULOSKELET
                   SYS & CONN
                   TISS O.R. PROC
                   W CC.
234.............  \7\ OTHER             0.4499         19.0         15.8
                   MUSCULOSKELET
                   SYS & CONN
                   TISS O.R. PROC
                   W/O CC.
235.............  \3\ FRACTURES         0.7637         24.8         20.7
                   OF FEMUR.
236.............  FRACTURES OF          0.6531         25.2         21.0
                   HIP & PELVIS.
237.............  \1\ SPRAINS,          0.4499         19.0         15.8
                   STRAINS, &
                   DISLOCATIONS
                   OF HIP, PELVIS
                   & THIGH.
238.............  OSTEOMYELITIS..       0.8278         28.3         23.6
239.............  PATHOLOGICAL          0.6935         23.6         19.7
                   FRACTURES &
                   MUSCULOSKELETA
                   L & CONN TISS
                   MALIGNANCY.
240.............  CONNECTIVE            0.7310         24.8         20.7
                   TISSUE
                   DISORDERS W CC.
241.............  \1\ CONNECTIVE        0.4499         19.0         15.8
                   TISSUE
                   DISORDERS W/O
                   CC.
242.............  SEPTIC                0.7864         26.5         22.1
                   ARTHRITIS.
243.............  MEDICAL BACK          0.6061         23.4         19.5
                   PROBLEMS.
244.............  BONE DISEASES &       0.5259         22.2         18.5
                   SPECIFIC
                   ARTHROPATHIES
                   W CC.
245.............  BONE DISEASES &       0.4635         20.4         17.0
                   SPECIFIC
                   ARTHROPATHIES
                   W/O CC.
246.............  \1\ NON-              0.4499         19.0         15.8
                   SPECIFIC
                   ARTHROPATHIES.
247.............  SIGNS &               0.5548         21.9         18.3
                   SYMPTOMS OF
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONN 8 TISSUE.
248.............  TENDONITIS,           0.6574         22.6         18.8
                   MYOSITIS &
                   BURSITIS.
249.............  AFTERCARE,            0.6577         24.7         20.6
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE.
250.............  \2\ FX, SPRN,         0.5837         21.3         17.8
                   STRN & DISL OF
                   FOREARM, HAND,
                   FOOT AGE >17 W
                   CC.
251.............  \1\ FX, SPRN,         0.4499         19.0         15.8
                   STRN & DISL OF
                   FOREARM, HAND,
                   FOOT AGE >17 W/
                   O CC.
252.............  \7\ 7 FX, SPRN,       0.7637         24.8         20.7
                   STRN & DISL OF
                   FOREARM, HAND,
                   FOOT AGE 0-17.
253.............  FX, SPRN, STRN        0.6802         26.3         21.9
                   & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE
                   >17 W CC.
254.............  \2\ FX, SPRN,         0.5837         21.3         17.8
                   STRN & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE
                   >17 W/O CC.
255.............  \7\ FX, SPRN,         0.7637         24.8         20.7
                   STRN & DISL OF
                   UPARM, LOWLEG
                   EX FOOT AGE 0-
                   17.
256.............  OTHER                 0.7924         25.3         21.1
                   MUSCULOSKELETA
                   L SYSTEM &
                   CONNECTIVE
                   TISSUE
                   DIAGNOSES.
257.............  \7\ TOTAL             0.7637         24.8         20.7
                   MASTECTOMY FOR
                   MALIGNANCY W
                   CC.
258.............  \7\ TOTAL             0.7637         24.8         20.7
                   MASTECTOMY FOR
                   MALIGNANCY W/O
                   CC.
259.............  \2\ SUBTOTAL          0.5837         21.3         17.8
                   MASTECTOMY FOR
                   MALIGNANCY W
                   CC.
260.............  \7\ SUBTOTAL          0.7637         24.8         20.7
                   MASTECTOMY FOR
                   MALIGNANCY W/O
                   CC.
261.............  \7\ BREAST PROC       0.7637         24.8         20.7
                   FOR NON-
                   MALIGNANCY
                   EXCEPT BIOPSY
                   & LOCAL
                   EXCISION.
262.............  \1\ BREAST            0.4499         19.0         15.8
                   BIOPSY & LOCAL
                   EXCISION FOR
                   NON-MALIGNANCY.
263.............  SKIN GRAFT &/OR       1.3222         39.5         32.9
                   DEBRID FOR SKN
                   ULCER OR
                   CELLULITIS W
                   CC.
264.............  SKIN GRAFT &/OR       0.9584         32.0         26.7
                   DEBRID FOR SKN
                   ULCER OR
                   CELLULITIS W/O
                   CC.

[[Page 27935]]

 
265.............  SKIN GRAFT &/OR       1.0398         33.1         27.6
                   DEBRID EXCEPT
                   FOR SKIN ULCER
                   OR CELLULITIS
                   W CC.
266.............  \3\ SKIN GRAFT        0.7637         24.8         20.7
                   &/OR DEBRID
                   EXCEPT FOR
                   SKIN ULCER OR
                   CELLULITIS W/O
                   CC.
267.............  \7\ PERIANAL &        0.7637         24.8         20.7
                   PILONIDAL
                   PROCEDURES.
268.............  \5\ SKIN,             1.7034         38.5         32.1
                   SUBCUTANEOUS
                   TISSUE &
                   BREAST PLASTIC
                   PROCEDURES.
269.............  OTHER SKIN,           1.3037         36.1         30.1
                   SUBCUT TISS &
                   BREAST PROC W
                   CC.
270.............  \3\ OTHER SKIN,       0.7637         24.8         20.7
                   SUBCUT TISS &
                   BREAST PROC W/
                   O CC.
271.............  SKIN ULCERS....       0.8720         27.7         23.1
272.............  MAJOR SKIN            0.7420         22.6         18.8
                   DISORDERS W CC.
273.............  \1\ MAJOR SKIN        0.4499         19.0         15.8
                   DISORDERS W/O
                   CC.
274.............  \3\ MALIGNANT         0.7637         24.8         20.7
                   BREAST
                   DISORDERS W CC.
275.............  \7\ MALIGNANT         0.7637         24.8         20.7
                   BREAST
                   DISORDERS W/O
                   CC.
276.............  \2\ NON-              0.5837         21.3         17.8
                   MALIGANT
                   BREAST
                   DISORDERS.
277.............  CELLULITIS AGE        0.6264         21.0         17.5
                   >17 W CC.
278.............  CELLULITIS AGE        0.4420         17.8         14.8
                   >17 W/O CC.
279.............  \7\ CELLULITIS        0.4499         19.0         15.8
                   AGE 0-17.
280.............  TRAUMA TO THE         0.6698         24.3         20.3
                   SKIN, SUBCUT
                   TISS & BREAST
                   AGE >17 W CC.
281.............  \1\ TRAUMA TO         0.4499         19.0         15.8
                   THE SKIN,
                   SUBCUT TISS &
                   BREAST AGE >17
                   W/O CC.
282.............  \7\ TRAUMA TO         0.4499         19.0         15.8
                   THE SKIN,
                   SUBCUT TISS &
                   BREAST AGE 0-
                   17.
283.............  MINOR SKIN            0.6935         23.9         19.9
                   DISORDERS W CC.
284.............  \1\ MINOR SKIN        0.4499         19.0         15.8
                   DISORDERS W/O
                   CC.
285.............  AMPUTAT OF            1.3501         35.6         29.7
                   LOWER LIMB FOR
                   ENDOCRINE,NUTR
                   IT,& METABOL
                   DISORDERS.
286.............  \7\ ADRENAL &         1.7034         38.5         32.1
                   PITUITARY
                   PROCEDURES.
287.............  SKIN GRAFTS &         1.1387         33.9         28.3
                   WOUND DEBRID
                   FOR ENDOC,
                   NUTRIT & METAB
                   DISORDERS.
288.............  \4\ O.R.              1.1820         29.6         24.7
                   PROCEDURES FOR
                   OBESITY.
289.............  \7\ PARATHYROID       1.1820         29.6         24.7
                   PROCEDURES.
290.............  \5\ THYROID           1.7034         38.5         32.1
                   PROCEDURES.
291.............  \7\                   1.1820         29.6         24.7
                   THYROGLOSSAL
                   PROCEDURES.
292.............  OTHER                 1.3409         31.7         26.4
                   ENDOCRINE,
                   NUTRIT & METAB
                   O.R. PROC W CC.
293.............  \2\ OTHER             0.5837         21.3         17.8
                   ENDOCRINE,
                   NUTRIT & METAB
                   O.R. PROC W/O
                   CC.
294.............  DIABETES AGE >.       0.7293         25.0         20.8
295.............  \3\ DIABETES          0.7637         24.8         20.7
                   AGE 0-35.
296.............  NUTRITIONAL &         0.7212         23.1         19.3
                   MISC METABOLIC
                   DISORDERS AGE
                   >17 W CC.
297.............  NUTRITIONAL &         0.5227         18.4         15.3
                   MISC METABOLIC
                   DISORDERS AGE
                   >17 W/O CC.
298.............  \7\ NUTRITIONAL       0.5837         21.3         17.8
                   & MISC
                   METABOLIC
                   DISORDERS AGE
                   0-17.
299.............  \4\ INBORN            1.1820         29.6         24.7
                   ERRORS OF
                   METABOLISM.
300.............  ENDOCRINE             0.6376         21.2         17.7
                   DISORDERS W CC.
301.............  \1\ ENDOCRINE         0.4499         19.0         15.8
                   DISORDERS W/O
                   CC.
302.............  \6\ KIDNEY            0.0000          0.0          0.0
                   TRANSPLANT.
303.............  \4\                   1.1820         29.6         24.7
                   KIDNEY,URETER
                   & MAJOR
                   BLADDER
                   PROCEDURES FOR
                   NEOPLASM.
304.............  \5\                   1.7034         38.5         32.1
                   KIDNEY,URETER
                   & MAJOR
                   BLADDER PROC
                   FOR NON-NEOPL
                   W CC.
305.............  \1\                   0.4499         19.0         15.8
                   KIDNEY,URETER
                   & MAJOR
                   BLADDER PROC
                   FOR NON-NEOPL
                   W/O CC.
306.............  \2\                   0.5837         21.3         17.8
                   PROSTATECTOMY
                   W CC.
307.............  \7\                   0.5837         21.3         17.8
                   PROSTATECTOMY
                   W/O CC.
308.............  \3\ MINOR             0.7637         24.8         20.7
                   BLADDER
                   PROCEDURES W
                   CC.
309.............  \7\ MINOR             0.7637         24.8         20.7
                   BLADDER
                   PROCEDURES W/O
                   CC.
310.............  \4\                   1.1820         29.6         24.7
                   TRANSURETHRAL
                   PROCEDURES W
                   CC.
311.............  \7\                   1.1820         29.6         24.7
                   TRANSURETHRAL
                   PROCEDURES W/O
                   CC.
312.............  \1\ URETHRAL          0.4499         19.0         15.8
                   PROCEDURES,
                   AGE >17 W CC.
313.............  \7\ URETHRAL          0.4499         19.0         15.8
                   PROCEDURES,
                   AGE >17 W/O CC.
314.............  \7\ URETHRAL          0.4499         19.0         15.8
                   PROCEDURES,
                   AGE 0-17.
315.............  OTHER KIDNEY &        1.4055         31.6         26.3
                   URINARY TRACT
                   O.R.
                   PROCEDURES.
316.............  RENAL FAILURE..       0.8219         22.7         18.9
317.............  ADMIT FOR RENAL       0.9852         25.2         21.0
                   DIALYSIS.
318.............  KIDNEY &              0.7586         20.2         16.8
                   URINARY TRACT
                   NEOPLASMS W CC.
319.............  \1\ KIDNEY &          0.4499         19.0         15.8
                   URINARY TRACT
                   NEOPLASMS W/O
                   CC.
320.............  KIDNEY &              0.6179         22.2         18.5
                   URINARY TRACT
                   INFECTIONS AGE
                   >17 W CC.
321.............  KIDNEY &              0.4792         19.0         15.8
                   URINARY TRACT
                   INFECTIONS AGE
                   >17 W/O CC.
322.............  \7\ KIDNEY &          0.4499         19.0         15.8
                   URINARY TRACT
                   INFECTIONS AGE
                   0-17.
323.............  \4\ URINARY           1.1820         29.6         24.7
                   STONES W CC, &/
                   OR ESW
                   LITHOTRIPSY.
324.............  \7\ URINARY           0.4499         19.0         15.8
                   STONES W/O CC.
325.............  \2\ KIDNEY &          0.5837         21.3         17.8
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE
                   >17 W CC.
326.............  \7\ KIDNEY &          0.4499         19.0         15.8
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE
                   >17 W/O CC.
327.............  \7\ KIDNEY &          0.4499         19.0         15.8
                   URINARY TRACT
                   SIGNS &
                   SYMPTOMS AGE 0-
                   17.
328.............  \1\ URETHRAL          0.4499         19.0         15.8
                   STRICTURE AGE
                   >17 W CC.

[[Page 27936]]

 
329.............  \7\ URETHRAL          0.4499         19.0         15.8
                   STRICTURE AGE
                   >17 W/O CC.
330.............  \7\ URETHRAL          0.4499         19.0         15.8
                   STRICTURE AGE
                   0-17.
331.............  OTHER KIDNEY &        0.8010         23.1         19.3
                   URINARY TRACT
                   DIAGNOSES AGE
                   >17 W CC.
332.............  \2\ OTHER             0.5837         21.3         17.8
                   KIDNEY &
                   URINARY TRACT
                   DIAGNOSES AGE
                   >17 W/O CC.
333.............  \7\ OTHER             0.5837         21.3         17.8
                   KIDNEY &
                   URINARY TRACT
                   DIAGNOSES AGE
                   0-17.
334.............  \2\ MAJOR MALE        0.5837         21.3         17.8
                   PELVIC
                   PROCEDURES W
                   CC.
335.............  \7\ MAJOR MALE        1.7034         38.5         32.1
                   PELVIC
                   PROCEDURES W/O
                   CC.
336.............  \2\                   0.5837         21.3         17.8
                   TRANSURETHRAL
                   PROSTATECTOMY
                   W CC.
337.............  \7\                   0.5837         21.3         17.8
                   TRANSURETHRAL
                   PROSTATECTOMY
                   W/O CC.
338.............  \7\ TESTES            0.5837         21.3         17.8
                   PROCEDURES,
                   FOR MALIGNANCY.
339.............  \4\ TESTES            1.1820         29.6         24.7
                   PROCEDURES,
                   NON-MALIGNANCY
                   AGE >17.
340.............  \7\ TESTES            1.1820         29.6         24.7
                   PROCEDURES,
                   NON-MALIGNANCY
                   AGE 0-17.
341.............  \4\ PENIS             1.1820         29.6         24.7
                   PROCEDURES.
342.............  \7\                   1.1820         29.6         24.7
                   CIRCUMCISION
                   AGE >17.
343.............  \7\                   1.1820         29.6         24.7
                   CIRCUMCISION
                   AGE 0-17.
344.............  \1\ OTHER MALE        0.4499         19.0         15.8
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROCEDURES FOR
                   MALIGNANCY.
345.............  \5\ OTHER MALE        1.7034         38.5         32.1
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROC EXCEPT
                   FOR MALIGNANCY.
346.............  MALIGNANCY,           0.6060         20.6         17.2
                   MALE
                   REPRODUCTIVE
                   SYSTEM, W CC.
347.............  \2\ MALIGNANCY,       0.5837         21.3         17.8
                   MALE
                   REPRODUCTIVE
                   SYSTEM, W/O CC.
348.............  \2\ BENIGN            0.5837         21.3         17.8
                   PROSTATIC
                   HYPERTROPHY W
                   CC.
349.............  \7\ BENIGN            1.1820         29.6         24.7
                   PROSTATIC
                   HYPERTROPHY W/
                   O CC.
350.............  INFLAMMATION OF       0.6798         21.9         18.3
                   THE MALE
                   REPRODUCTIVE
                   SYSTEM.
351.............  \7\                   1.1820         29.6         24.7
                   STERILIZATION,
                   MALE.
352.............  OTHER MALE            0.6375         23.4         19.5
                   REPRODUCTIVE
                   SYSTEM
                   DIAGNOSES.
353.............  \7\ PELVIC            1.1820         29.6         24.7
                   EVISCERATION,
                   RADICAL
                   HYSTERECTOMY &
                   RADICAL
                   VULVECTOMY.
354.............  \7\                   1.1820         29.6         24.7
                   UTERINE,ADNEXA
                   PROC FOR NON-
                   OVARIAN/
                   ADNEXAL MALIG
                   W CC.
355.............  \7\                   1.1820         29.6         24.7
                   UTERINE,ADNEXA
                   PROC FOR NON-
                   OVARIAN/
                   ADNEXAL MALIG
                   W/O CC.
356.............  \7\ FEMALE            1.1820         29.6         24.7
                   REPRODUCTIVE
                   SYSTEM
                   RECONSTRUCTIVE
                   PROCEDURES.
357.............  \7\ UTERINE &         1.1820         29.6         24.7
                   ADNEXA PROC
                   FOR OVARIAN OR
                   ADNEXAL
                   MALIGNANCY.
358.............  \7\ UTERINE &         1.1820         29.6         24.7
                   ADNEXA PROC
                   FOR NON-
                   MALIGNANCY W
                   CC.
359.............  \7\ UTERINE &         1.1820         29.6         24.7
                   ADNEXA PROC
                   FOR NON-
                   MALIGNANCY W/O
                   CC.
360.............  \4\ VAGINA,           1.1820         29.6         24.7
                   CERVIX & VULVA
                   PROCEDURES.
361.............  \7\ LAPAROSCOPY       0.7637         24.8         20.7
                   & INCISIONAL
                   TUBAL
                   INTERRUPTION.
362.............  \7\ ENDOSCOPIC        0.7637         24.8         20.7
                   TUBAL
                   INTERRUPTION.
363.............  \7\ D&C,              0.7637         24.8         20.7
                   CONIZATION &
                   RADIO-IMPLANT,
                   FOR MALIGNANCY.
364.............  \5\ D&C,              1.7034         38.5         32.1
                   CONIZATION
                   EXCEPT FOR
                   MALIGNANCY.
365.............  \5\ OTHER             1.7034         38.5         32.1
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM O.R.
                   PROCEDURES.
366.............  MALIGNANCY,           0.7072         20.3         16.9
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM W CC.
367.............  \7\ MALIGNANCY,       0.7637         24.8         20.7
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM W/O CC.
368.............  INFECTIONS,           0.6416         20.7         17.3
                   FEMALE
                   REPRODUCTIVE
                   SYSTEM.
369.............  \3\ MENSTRUAL &       0.7637         24.8         20.7
                   OTHER FEMALE
                   REPRODUCTIVE
                   SYSTEM
                   DISORDERS.
370.............  \7\ CESAREAN          0.7637         24.8         20.7
                   SECTION W CC.
371.............  \7\ CESAREAN          0.5837         21.3         17.8
                   SECTION W/O CC.
372.............  \7\ VAGINAL           0.7637         24.8         20.7
                   DELIVERY W
                   COMPLICATING
                   DIAGNOSES.
373.............  \7\ VAGINAL           0.7637         24.8         20.7
                   DELIVERY W/O
                   COMPLICATING
                   DIAGNOSES.
374.............  \7\ VAGINAL           0.7637         24.8         20.7
                   DELIVERY W
                   STERILIZATION
                   &/OR D&C.
375.............  \7\ VAGINAL           0.7637         24.8         20.7
                   DELIVERY W
                   O.R. PROC
                   EXCEPT STERIL
                   &/OR D&C.
376.............  \7\ POSTPARTUM        0.7637         24.8         20.7
                   & POST
                   ABORTION
                   DIAGNOSES W/O
                   O.R. PROCEDURE.
377.............  \7\ POSTPARTUM        0.7637         24.8         20.7
                   & POST
                   ABORTION
                   DIAGNOSES W
                   O.R. PROCEDURE.
378.............  \7\ ECTOPIC           0.7637         24.8         20.7
                   PREGNANCY.
379.............  \7\ THREATENED        0.7637         24.8         20.7
                   ABORTION.
380.............  \7\ ABORTION W/       0.7637         24.8         20.7
                   O D&C.
381.............  \7\ ABORTION W        0.7637         24.8         20.7
                   D&C,
                   ASPIRATION
                   CURETTAGE OR
                   HYSTEROTOMY.
382.............  \7\ FALSE LABOR       0.7637         24.8         20.7
383.............  \7\ OTHER             0.7637         24.8         20.7
                   ANTEPARTUM
                   DIAGNOSES W
                   MEDICAL
                   COMPLICATIONS.
384.............  \7\ OTHER             0.7636         24.8         20.7
                   ANTEPARTUM
                   DIAGNOSES W/O
                   MEDICAL
                   COMPLICATIONS.
385.............  \7\ NEONATES,         0.7636         24.8         20.7
                   DIED OR
                   TRANSFERRED TO
                   ANOTHER ACUTE
                   CARE FACILITY.
386.............  \7\ EXTREME           1.1820         29.6         24.7
                   IMMATURITY.
387.............  \7\ PREMATURITY       1.1820         29.6         24.7
                   W MAJOR
                   PROBLEMS.
388.............  \7\ PREMATURITY       0.7637         24.8         20.7
                   W/O MAJOR
                   PROBLEMS.
389.............  \7\ FULL TERM         1.1820         29.6         24.7
                   NEONATE W
                   MAJOR PROBLEMS.
390.............  \7\ NEONATE W         1.1820         29.6         24.7
                   OTHER
                   SIGNIFICANT
                   PROBLEMS.
391.............  \7\ NORMAL            0.7637         24.8         20.7
                   NEWBORN.

[[Page 27937]]

 
392.............  \7\ SPLENECTOMY       0.7637         24.8         20.7
                   AGE >17.
393.............  \7\ SPLENECTOMY       0.7637         24.8         20.7
                   AGE 0-17.
394.............  \5\ OTHER O.R.        1.7034         38.5         32.1
                   PROCEDURES OF
                   THE BLOOD AND
                   BLOOD FORMING
                   ORGANS.
395.............  RED BLOOD CELL        0.6581         22.0         18.3
                   DISORDERS AGE
                   >17.
396.............  \7\ RED BLOOD         0.5837         21.3         17.8
                   CELL DISORDERS
                   AGE 0-17.
397.............  COAGULATION           0.8675         22.9         19.1
                   DISORDERS.
398.............  RETICULOENDOTHE       0.8240         23.7         19.8
                   LIAL &
                   IMMUNITY
                   DISORDERS W CC.
399.............  \2\                   0.5837         21.3         17.8
                   RETICULOENDOTH
                   ELIAL &
                   IMMUNITY
                   DISORDERS W/O
                   CC.
401.............  \5\ LYMPHOMA &        1.7034         38.5         32.1
                   NON-ACUTE
                   LEUKEMIA W
                   OTHER O.R.
                   PROC W CC.
402.............  \7\ LYMPHOMA &        0.5837         21.3         17.8
                   NON-ACUTE
                   LEUKEMIA W
                   OTHER O.R.
                   PROC W/O CC.
403.............  LYMPHOMA & NON-       0.8757         21.3         17.8
                   ACUTE LEUKEMIA
                   W CC.
404.............  \2\ LYMPHOMA &        0.5837         21.3         17.8
                   NON-ACUTE
                   LEUKEMIA W/O
                   CC.
405.............  \7\ ACUTE             0.5837         21.3         17.8
                   LEUKEMIA W/O
                   MAJOR O.R.
                   PROCEDURE AGE
                   0-17.
406.............  \4\ MYELOPROLIF       1.1820         29.6         24.7
                   DISORD OR
                   POORLY DIFF
                   NEOPL W MAJ
                   O.R.PROC W CC.
407.............  \7\ MYELOPROLIF       1.1820         29.6         24.7
                   DISORD OR
                   POORLY DIFF
                   NEOPL W MAJ
                   O.R.PROC W/O
                   CC.
408.............  \4\ MYELOPROLIF       1.1820         29.6         24.7
                   DISORD OR
                   POORLY DIFF
                   NEOPL W OTHER
                   O.R.PROC.
409.............  RADIOTHERAPY...       0.8642         23.5         19.6
410.............  CHEMOTHERAPY W/       1.1684         26.4         22.0
                   O ACUTE
                   LEUKEMIA AS
                   SECONDARY
                   DIAGNOSIS.
411.............  \7\ HISTORY OF        0.7637         24.8         20.7
                   MALIGNANCY W/O
                   ENDOSCOPY.
412.............  \7\ HISTORY OF        0.7637         24.8         20.7
                   MALIGNANCY W
                   ENDOSCOPY.
413.............  OTHER                 0.8920         20.5         17.1
                   MYELOPROLIF
                   DIS OR POORLY
                   DIFF NEOPL
                   DIAG W CC.
414.............  \7\ OTHER             0.5837         21.3         17.8
                   MYELOPROLIF
                   DIS OR POORLY
                   DIFF NEOPL
                   DIAG W/O CC.
415.............  O.R. PROCEDURE        1.4251         35.6         29.7
                   FOR INFECTIOUS
                   & PARASITIC
                   DISEASES.
416.............  SEPTICEMIA AGE        0.8241         23.5         19.6
                   >17.
417.............  \7\ SEPTICEMIA        0.7637         24.8         20.7
                   AGE 0-17.
418.............  POSTOPERATIVE &       0.8252         24.7         20.6
                   POST-TRAUMATIC
                   INFECTIONS.
419.............  \4\ FEVER OF          1.1820         29.6         24.7
                   UNKNOWN ORIGIN
                   AGE >17 W CC.
420.............  \7\ FEVER OF          1.1820         29.6         24.7
                   UNKNOWN ORIGIN
                   AGE >17 W/O CC.
421.............  VIRAL ILLNESS         0.9441         27.3         22.8
                   AGE >17.
422.............  \7\ VIRAL             0.4499         19.0         24.7
                   ILLNESS &
                   FEVER OF
                   UNKNOWN ORIGIN
                   AGE 0-17.
423.............  OTHER                 0.9505         21.8         18.2
                   INFECTIOUS &
                   PARASITIC
                   DISEASES
                   DIAGNOSES.
424.............  \3\ O.R.              0.7637         24.8         20.7
                   PROCEDURE W
                   PRINCIPAL
                   DIAGNOSES OF
                   MENTAL ILLNESS.
425.............  \2\ ACUTE             0.5837         21.3         17.8
                   ADJUSTMENT
                   REACTION &
                   PSYCHOLOGICAL
                   DYSFUNCTION.
426.............  DEPRESSIVE            0.4113         20.7         17.3
                   NEUROSES.
427.............  NEUROSES EXCEPT       0.4653         23.8         19.8
                   DEPRESSIVE.
428.............  \1\ DISORDERS         0.4499         19.0         15.8
                   OF PERSONALITY
                   & IMPULSE
                   CONTROL.
429.............  ORGANIC               0.5813         26.8         22.3
                   DISTURBANCES &
                   MENTAL
                   RETARDATION.
430.............  PSYCHOSES......       0.4330         24.2         20.2
431.............  \1\ CHILDHOOD         0.4499         19.0         15.8
                   MENTAL
                   DISORDERS.
432.............  \2\ OTHER             0.5837         21.3         17.8
                   MENTAL
                   DISORDER
                   DIAGNOSES.
433.............  \2\ ALCOHOL/          0.5837         21.3         17.8
                   DRUG ABUSE OR
                   DEPENDENCE,
                   LEFT AMA.
439.............  SKIN GRAFTS FOR       1.3677         35.6         29.7
                   INJURIES.
440.............  WOUND                 1.3442         36.1         30.1
                   DEBRIDEMENTS
                   FOR INJURIES.
441.............  \1\ HAND              0.4499         19.0         15.8
                   PROCEDURES FOR
                   INJURIES.
442.............  OTHER O.R.            1.3937         33.4         27.8
                   PROCEDURES FOR
                   INJURIES W CC.
443.............  \3\ OTHER O.R.        0.7637         24.8         20.7
                   PROCEDURES FOR
                   INJURIES W/O
                   CC.
444.............  TRAUMATIC             0.7584         26.3         21.9
                   INJURY AGE >17
                   W CC.
445.............  \1\ TRAUMATIC         0.4499         19.0         15.8
                   INJURY AGE >17
                   W/O CC9.
446.............  \7\ TRAUMATIC         0.4499         19.0         15.8
                   INJURY AGE 0-
                   17.
447.............  \2\ ALLERGIC          0.5837         21.3         17.8
                   REACTIONS AGE
                   >17.
448.............  \7\ ALLERGIC          0.5837         21.3         17.8
                   REACTIONS AGE
                   0-17.
449.............  \3\ POISONING &       0.7637         24.8         20.7
                   TOXIC EFFECTS
                   OF DRUGS AGE
                   >17 W CC.
450.............  \7\ POISONING &       0.7637         24.8         20.7
                   TOXIC EFFECTS
                   OF DRUGS AGE
                   >17 W/O CC.
451.............  \7\ POISONING &       0.7637         24.8         20.7
                   TOXIC EFFECTS
                   OF DRUGS AGE 0-
                   17 7.
452.............  COMPLICATIONS         0.9265         25.3         21.1
                   OF TREATMENT W
                   CC.
453.............  COMPLICATIONS         0.5871         23.8         19.8
                   OF TREATMENT W/
                   O CC.
454.............  \3\ OTHER             0.7637         24.8         20.7
                   INJURY,
                   POISONING &
                   TOXIC EFFECT
                   DIAG W CC.
455.............  \7\ OTHER             0.7637         24.8         20.7
                   INJURY,
                   POISONING &
                   TOXIC EFFECT
                   DIAG W/O CC.
461.............  O.R. PROC W           1.2245         34.0         28.3
                   DIAGNOSES OF
                   OTHER CONTACT
                   W HEALTH
                   SERVICES.
462.............  REHABILITATION.       0.5787         22.4         18.7
463.............  SIGNS &               0.6258         23.8         19.8
                   SYMPTOMS W CC.
464.............  SIGNS &               0.5554         24.1         20.1
                   SYMPTOMS W/O
                   CC.
465.............  AFTERCARE W           0.6958         21.9         18.3
                   HISTORY OF
                   MALIGNANCY AS
                   SECONDARY
                   DIAGNOSIS.
466.............  AFTERCARE W/O         0.6667         21.9         18.3
                   HISTORY OF
                   MALIGNANCY AS
                   SECONDARY
                   DIAGNOSIS.
467.............  \3\ OTHER             0.7637         24.8         20.7
                   FACTORS
                   INFLUENCING
                   HEALTH STATUS.
468.............  EXTENSIVE O.R.        2.1478         40.2         33.5
                   PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.

[[Page 27938]]

 
469.............  \6\ PRINCIPAL         0.0000          0.0          0.0
                   DIAGNOSIS
                   INVALID AS
                   DISCHARGE
                   DIAGNOSIS.
470.............  \6\ UNGROUPABLE       0.0000          0.0          0.0
471.............  \5\ BILATERAL         1.7034         38.5         32.1
                   OR MULTIPLE
                   MAJOR JOINT
                   PROCS OF LOWER
                   EXTREMITY.
473.............  ACUTE LEUKEMIA        0.8537         20.0         16.7
                   W/O MAJOR O.R.
                   PROCEDURE AGE
                   >17.
475.............  RESPIRATORY           2.0831         34.6         28.8
                   SYSTEM
                   DIAGNOSIS WITH
                   VENTILATOR
                   SUPPORT.
476.............  \4\ PROSTATIC         1.1820         29.6         24.7
                   O.R. PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.
477.............  NON-EXTENSIVE         1.5836         35.3         29.4
                   O.R. PROCEDURE
                   UNRELATED TO
                   PRINCIPAL
                   DIAGNOSIS.
479.............  \7\ OTHER             0.7637         24.8         20.7
                   VASCULAR
                   PROCEDURES W/O
                   CC.
480.............  \6\ LIVER             0.0000          0.0          0.0
                   TRANSPLANT.
481.............  \7\ BONE MARROW       1.7034         38.5         32.1
                   TRANSPLANT.
482.............  \5\                   1.7034         38.5         32.1
                   TRACHEOSTOMY
                   FOR FACE,MOUTH
                   & NECK
                   DIAGNOSES.
484.............  \2\ CRANIOTOMY        0.5837         21.3         17.8
                   FOR MULTIPLE
                   SIGNIFICANT
                   TRAUMA.
485.............  \7\ LIMB              1.1820         29.6         24.7
                   REATTACHMENT,
                   HIP AND FEMUR
                   PROC FOR
                   MULTIPLE
                   SIGNIFICANT TR.
486.............  \5\ OTHER O.R.        1.7034         38.5         32.1
                   PROCEDURES FOR
                   MULTIPLE
                   SIGNIFICANT
                   TRAUMA.
487.............  OTHER MULTIPLE        0.8992         26.0         21.7
                   SIGNIFICANT
                   TRAUMA.
488.............  \5\ HIV W             1.7034         38.5         32.1
                   EXTENSIVE
                   O.R.PROCEDURE.
489.............  HIV W MAJOR           0.8535         21.4         17.8
                   RELATED
                   CONDITION.
490.............  HIV W OR W/O          0.4919         16.6         13.8
                   OTHER RELATED
                   CONDITION.
491.............  \5\ MAJOR JOINT       1.7034         38.5         32.1
                   & LIMB
                   REATTACHMENT
                   PROCEDURES OF
                   UPPER
                   EXTREMITY.
492.............  \7\                   1.1820         29.6         24.7
                   CHEMOTHERAPY W
                   ACUTE LEUKEMIA
                   AS SECONDARY
                   DIAGNOSIS.
493.............  \5\                   1.7034         38.5         32.1
                   LAPAROSCOPIC
                   CHOLECYSTECTOM
                   Y W/O C.D.E. W
                   CC.
494.............  \7\                   1.7034         38.5         32.1
                   LAPAROSCOPIC
                   CHOLECYSTECTOM
                   Y W/O C.D.E. W/
                   O CC.
495.............  \6\ LUNG              0.0000          0.0          0.0
                   TRANSPLANT.
496.............  \7\ COMBINED          1.1820         29.6         24.7
                   ANTERIOR/
                   POSTERIOR
                   SPINAL FUSION.
497.............  \4\ SPINAL            1.1820         29.6         24.7
                   FUSION W CC.
498.............  \7\ SPINAL            1.1820         29.6         24.7
                   FUSION W/O CC.
499.............  \5\ BACK & NECK       1.7034         38.5         32.1
                   PROCEDURES
                   EXCEPT SPINAL
                   FUSION W CC.
500.............  \4\ BACK & NECK       1.1820         29.6         24.7
                   PROCEDURES
                   EXCEPT SPINAL
                   FUSION W/O CC.
501.............  \5\ KNEE              1.7034         38.5         32.1
                   PROCEDURES W
                   PDX OF
                   INFECTION W CC.
502.............  \4\ KNEE              1.1820         29.6         24.7
                   PROCEDURES W
                   PDX OF
                   INFECTION W/O
                   CC.
503.............  \2\ KNEE              0.5837         21.3         17.8
                   PROCEDURES W/O
                   PDX OF
                   INFECTION.
504.............  \7\ EXTENSIVE         1.7034         38.5         32.1
                   BURN OR FULL
                   THICKNESS
                   BURNS WITH
                   MECH VENT 96+
                   HOURS WITH
                   SKIN GRAFT.
505.............  \4\ EXTENSIVE         1.1820         29.6         24.7
                   BURN OR FULL
                   THICKNESS
                   BURNS WITH
                   MECH VENT 96+
                   HOURS WITHOUT
                   SKIN GRAFT.
506.............  \4\ FULL              1.1820         29.6         24.7
                   THICKNESS BURN
                   W SKIN GRAFT
                   OR INHAL INJ W
                   CC OR SIG
                   TRAUMA.
507.............  \3\ FULL              0.7637         24.8         20.7
                   THICKNESS BURN
                   W SKIN GRFT OR
                   INHAL INJ W/O
                   CC OR SIG
                   TRAUMA.
508.............  FULL THICKNESS        0.8367         29.4         24.5
                   BURN W/O SKIN
                   GRFT OR INHAL
                   INJ W CC OR
                   SIG TRAUMA.
509.............  \1\ FULL              0.4499         19.0         15.8
                   THICKNESS BURN
                   W/O SKIN GRFT
                   OR INH INJ W/O
                   CC OR SIG
                   TRAUMA.
510.............  NON-EXTENSIVE         0.7709         24.6         20.5
                   BURNS W CC OR
                   SIGNIFICANT
                   TRAUMA.
511.............  \1\ NON-              0.4499         19.0         15.8
                   EXTENSIVE
                   BURNS W/O CC
                   OR SIGNIFICANT
                   TRAUMA.
512.............  \6\                   0.0000          0.0          0.0
                   SIMULTANEOUS
                   PANCREAS/
                   KIDNEY
                   TRANSPLANT.
513.............  \6\ PANCREAS          0.0000          0.0          0.0
                   TRANSPLANT.
515.............  \5\ CARDIAC           1.7034         38.5         32.1
                   DEFIBRILATOR
                   IMPLANT W/O
                   CARDIAC CATH.
518.............  \7\                   0.7637         24.8         20.7
                   PERCUTANEOUS
                   CARDIVASCULAR
                   PROC W/O
                   CORONARY
                   ARTERY STENT
                   OR AMI.
519.............  \5\ CERVICAL          1.7034         38.5         32.1
                   SPINAL FUSION
                   W CC.
520.............  \7\ CERVICAL          1.1820         29.6         24.7
                   SPINAL FUSION
                   W/O CC.
521.............  ALCOHOL/DRUG          0.4457         19.4         16.2
                   ABUSE OR
                   DEPENDENCE W
                   CC.
522.............  \7\ ALCOHOL/          0.4499         19.0         15.8
                   DRUG ABUSE OR
                   DEPENDENCE W
                   REHABILITATION
                   THERAPY W/O CC.
523.............  \7\ ALCOHOL/          0.4499         19.0         15.8
                   DRUG ABUSE OR
                   DEPENDENCE W/O
                   REHABILITATION
                   THERAPY W/O CC.
524.............  TRANSIENT             0.5043         21.1         17.6
                   ISCHEMIA.
525.............  \7\ OTHER HEART       1.7034         38.5         32.1
                   ASSIST SYSTEM
                   IMPLANT.
528.............  \7\                   1.7034         38.5         32.1
                   INTRACRANIAL
                   VASCULAR PROC
                   W PDX
                   HEMORRHAGE.
529.............  \5\ VENTRICULAR       1.7034         38.5         32.1
                   SHUNT
                   PROCEDURES W
                   CC.
530.............  \7\ VENTRICULAR       1.7034         38.5         32.1
                   SHUNT
                   PROCEDURES W/O
                   CC.
531.............  \3\ SPINAL            0.7637         24.8         20.7
                   PROCEDURES
                   WITH CC.
532.............  \3\ SPINAL            0.7637         24.8         20.7
                   PROCEDURES
                   WITHOUT CC.

[[Page 27939]]

 
533.............  \5\                   1.7034         38.5         32.1
                   EXTRACRANIAL
                   VASCULAR
                   PROCEDURES
                   WITH CC.
534.............  \7\                   1.1820         29.6         24.7
                   EXTRACRANIAL
                   VASCULAR
                   PROCEDURES
                   WITHOUT CC.
535.............  \7\ CARDIAC           1.7034         38.5         32.1
                   DEFIB IMPLANT
                   W CARDIAC CATH
                   W AMI/HF/SHOCK.
536.............  \7\ CARDIAC           1.7034         38.5         32.1
                   DEFIB IMPLANT
                   W CARDIAC CATH
                   W/O AMI/HF/
                   SHOCK.
537.............  LOCAL EXCISION        1.1615         34.7         28.9
                   AND REMOVAL OF
                   INTERNAL
                   FIXATION
                   DEVICES EXCEPT
                   HIP AND FEMUR
                   WITH CC.
538.............  \7\ LOCAL             1.1820         29.6         24.7
                   EXCISION AND
                   REMOVAL OF
                   INTERNAL
                   FIXATION
                   DEVICES EXCEPT
                   HIP AND FEMUR
                   WITHOUT CC.
539.............  \4\ LYMPHOMA          1.1820         29.6         24.7
                   AND LEUKEMIA
                   WITH MAJOR
                   O.R. PROCEDURE
                   WITH CC.
540.............  \7\ LYMPHOMA          0.5837         21.3         17.8
                   AND LEUKEMIA
                   WITH MAJOR
                   O.R. PROCEDURE
                   WITHOUT CC.
541.............  ECMO OR TRACH W       4.2287         65.6         54.7
                   MECH VENT 96+
                   HRS OR PDX
                   EXCEPT
                   FACE,MOUTH &
                   NECK DIAG WITH
                   MAJOR OR.
542.............  TRACH W MECH          3.1869         48.2         40.2
                   VENT 96+ HRS
                   OR PDX EXCEPT
                   FACE,MOUTH &
                   NECK DIAG
                   WITHOUT MAJOR
                   OR.
543.............  CRANIOTOMY W          1.7034         38.5         32.1
                   IMPLANT OF
                   CHEMO AGENT OR
                   ACUTE COMPLEX
                   CNS PDX.
544.............  \5\ MAJOR JOINT       1.7034         38.5         32.1
                   REPLACEMENT OR
                   REATTACHMENT
                   OF LOWER
                   EXTREMITY.
545.............  \5\ REVISION OF       1.7034         38.5         32.1
                   HIP OR KNEE
                   REPLACEMENT.
546.............  \7\ SPINAL            1.7034         38.5         32.1
                   FUSION EXCEPT
                   CERVICAL WITH
                   CURVATURE OF
                   SPINE OR
                   MALIGNANCY.
547.............  \7\ CORONARY          1.7034         38.5         32.1
                   BYPASS WITH
                   CARDIAC CATH
                   WITH MAJOR CV
                   DIAGNOSIS.
548.............  \7\ CORONARY          1.7034         38.5         32.1
                   BYPASS WITH
                   CARDIAC CATH
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
549.............  \7\ CORONARY          1.7034         38.5         32.1
                   BYPASS WITHOUT
                   CARDIAC CATH
                   WITH MAJOR CV
                   DIAGNOSIS.
550.............  \7\ CORONARY          1.7034         38.5         32.1
                   BYPASS WITHOUT
                   CARDIAC CATH
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
551.............  \4\ PERMANENT         1.1820         29.6         24.7
                   CARDIAC
                   PACEMAKER
                   IMPLANT WITH
                   MAJOR CV
                   DIAGNOSIS OR
                   AICD LEAD OR
                   GNRTR.
552.............  \4\ OTHER             1.1820         29.6         24.7
                   PERMANENT
                   CARDIAC
                   PACEMAKER
                   IMPLANT
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
553.............  \8\ OTHER             1.3255         30.6         25.5
                   VASCULAR
                   PROCEDURES
                   WITH CC WITH
                   MAJOR CV
                   DIAGNOSIS.
554.............  \8\ OTHER             1.3255         30.6         25.5
                   VASCULAR
                   PROCEDURES
                   WITH CC
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
555.............  \4\                   1.1820         29.6         24.7
                   PERCUTANEOUS
                   CARDIOVASCULAR
                   PROC WITH
                   MAJOR CV
                   DIAGNOSIS.
556.............  \8\                   1.1820         29.6         24.7
                   PERCUTANEOUS
                   CARDIOVASCULAR
                   PROC WITH NON-
                   DRUG-ELUTING
                   STENT WITHOUT
                   MAJOR CV
                   DIAGNOSISPROC
                   WITH NON-DRUG-
                   ELUTING STENT
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
557.............  \8\                   1.1820         29.6         24.7
                   PERCUTANEOUS
                   CARDIOVASCULAR
                   PROC WITH DRUG-
                   ELUTING STENT
                   WITH MAJOR CV
                   DIAGNOSIS.
558.............  \7\                   1.1820         29.6         24.7
                   PERCUTANEOUS
                   CARDIOVASCULAR
                   PROC WITH DRUG-
                   ELUTING STENT
                   WITHOUT MAJOR
                   CV DIAGNOSIS.
559.............  \7\ ACUTE             0.7637         24.8        20.7
                   ISCHEMIC
                   STROKE WITH
                   USE OF
                   THROMBOLYTIC
                   AGENT.
------------------------------------------------------------------------
\1\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 1.
\2\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 2.
\3\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 3.
\4\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 4.
\5\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 5.
\6\ Relative weights for these LTC-DRGs were assigned a value of 0.0000.
 
\7\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to the appropriate low volume quintile because there are
  no LTCH cases in the FY 2004 MedPAR file.
\8\ Relative weights for these LTC-DRGs were determined after adjusting
  to account for nonmonotonicity.

[FR Doc. 06-4240 Filed 5-2-06; 3:45 pm]
BILLING CODE 4120-01-P